as part of our
) board ignited a firestorm in early July, when it replaced CEO
Bill Johnson with Chairman Jim Rogers just hours after completing
the Progress Energy merger. Last week, it took a giant step toward
extinguishing any still smoldering embers by reaching a deal with
North Carolina regulators that resolves several points of
Under the agreement, Duke's longtime boss Rogers will step down
as Chairman and CEO by the end of 2013. A new board drawn equally
from pre-merger Duke and Progress will choose his successor, with a
target date of July 1. Neither Johnson nor Rogers is eligible for
The company also promised several other "reassignments," with
the goal of meeting regulators' desire to "restore the balance
between legacy Duke and legacy Progress." That includes keeping at
least 1,000 employees in Raleigh, N.C., the former headquarters of
Duke has also agreed to defer an upcoming request for a rate
increase until February 2013. And the company will guarantee
customers an additional $25 million fuel-related cost savings,
bringing total promised synergies from the deal to $675
In return, North Carolina regulators will end their review of
the Duke/Progress merger, which was launched immediately after the
so-called "boardroom coup." And by reaching a settlement-rather
than dragging out controversy-the company also removes considerable
uncertainty about future regulatory relations, which have
historically been among the most constructive in the country.
The deal doesn't at this time include North Carolina Attorney
General Roy Cooper, who is investigating whether the CEO switch
violated state law. Cooper has for several months tried to turn the
controversy into a broader indictment of the state's
. And he's likely to remain a thorn in the side of the company and
regulators as they iron out a rate deal next year.
But assuming the full North Carolina Utilities Commission
approves the agreement on Monday as expected, it's a very positive
step for Duke after a troubled few months. And the same goes for
other utilities operating in the state, including
Piedmont Natural Gas
From a big-picture standpoint, the Duke deal is the first major
regulatory development for utilities since the Nov. 6 election
returned President Obama to office with essentially the same
Congress. That vote also favored continuity on the state level. In
fact, North Carolina had the only governorship to change hands,
with a Republican replacing a Democrat.
Given the generally strong relations between utilities and
regulators around the country over the past decade or so,
continuity is positive from a utility standpoint.
This time, however, it comes along with a sluggish national
economy that could face a huge negative shock on Jan. 1. My view is
the odds still favor Congress and the president reaching a budget
deal, and averting the package of automatic tax increases and
But until the US economy really starts to fire up, pressure on
regulators to delay or derail utility rate increases is likely to
intensify. Particularly at risk are companies operating in states
where politicians have historically used utility bashing to score
points with voters.
New York is one regulatory environment definitely flashing red
for investors now. Governor Andrew Cuomo has set up a commission to
investigate utilities' response to Hurricane Sandy, with subpoenas
expected for all of the state's major power companies and harsh
penalties promised for any alleged "offenders."
Ironically, the Empire State's worst performer during the crisis
was the Long Island Power Authority (LIPA). Mr. Cuomo's father,
then-Governor Mario Cuomo, essentially set up LIPA by breaking up
the former Long Island Lighting Co (LILCO). That was part of a deal
that permanently shuttered the Shoreham nuclear power plant and
sold off LILCO's gas distribution assets to the former Brooklyn
Union Gas. That company in turn became KeySpan Energy, which was
acquired by Britain's
(London: NG, NYSE: NGG) in 2007.
National Grid in turn operates LIPA under contract and is widely
blamed for the Authority's failure to restore power for weeks
following Hurricane Sandy.
Public Service Enterprise Group
) will replace it as operator when its contract expires next
Of course, public power works properly in many parts of the
country. The LIPA saga, however, is a very clear indictment of what
happens when politicians and regulators constantly meddle with
electric utilities under their jurisdiction. In such environments,
it's not just impossible for companies to do the necessary
long-term planning to stay ahead of the curve. There's not even any
incentive to try.
It's no coincidence New York utilities have some of the highest
power rates in the nation, despite a comparative wealth of
resources. Nor is it a surprise that reliability, customer
satisfaction and even shareholder returns all historically have
ranked among the industry's worst.
The message could not be clearer for investors. If you're going
to buy utility stocks, don't fall into the trap of believing one
size fits all and that you can just pick anything.
Only companies that can recover system investment consistently
over time will be able to reward customers with superior service at
low rates, and shareholders with robust and reliable returns. The
only way that's possible is through good relations with regulators.
And the only sector companies worth owning are those that have
them. You can uncover several top dividend-paying utility picks in
my free report.
This article by Roger Conrad was originally published on
Investing Daily under the title,
Duke Makes a Deal