Progress Energy Inc.'s $17.9 billion merger with Duke Energy Corp. hangs in the balance as regulators weigh their final opinion on the electric utility deal.

The merger, which combines Duke operations in Indiana and North and South Carolina with Progress' utility holdings in Florida and the eastern Carolinas, was announced in January 2011 and has been under an extended review by the Federal Energy Regulatory Commission. Duke last supplied FERC with a response to its potential issues with the deal in late March and requested the agency respond by June 8.

FERC had no comment on the matter Friday. A ruling from the agency could come at any time but there is no official deadline.

The terms of the deal call for Progress Energy shares to be exchanged for 2.6125 Duke shares and the spread has widened on concerns that FERC could ask Duke for more concessions than it is willing to accept to get the deal done. On Friday, the spread was roughly $2.60, or 4.5%. The companies have targeted July 1 as a close date, which implies an annualized return of roughly 70%.

A number of risk arbitrage investors in the deal expect it will be completed, but that assumption counts on FERC not adding significant conditions to the most recent offerings from Duke.

Duke declined to comment on the process, saying only that it was in FERC's hands. Duke anticipates it will have to review whatever response FERC presents, when it acts, before making any comment. The integration for the year-and-a-half-old merger was hindered in December when the regulatory review stalled, but has recently been restarted, a source said. However, the extent of the integration proceedings -- customer service and operational functions relating to the companies' joint dispatch of electric generation -- are the minimum of what Duke would have to plan for at this stage.

One arb said some investors believe that if FERC has additional responses to the March proposal that they will be minimal and the deal will get done. But the merger also still requires approval by the state utility commissions in North and South Carolina. South Carolina must approve the joint distribution agreement and North Carolina has to OK the merger itself and its benefits to ratepayers. The companies have already filed with the states regarding their offerings to FERC.

One potential glitch is that if FERC asks for any additional concessions, that will flow down into the state reviews. Neither state has a set timetable for its process. The presumption has been that once FERC acts, the states could conclude their process in about three weeks. The deal has a July 8 termination date. If FERC requests more from Duke, that could further stall the North Carolina review process and push the deal's closing past the termination date. So if Duke is no longer pleased with the economics of the merger, the North Carolina review process could give it room to walk away, which accounts for the spread.

Arbs have bet a significant amount of money on the deal, so if it collapses there would be a lot of pain to funds and it would likely affect spreads in other transactions.