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Duke-Cinergy Merger, MidAmerican Buy of PacifiCorp Clear FERC Hurdle

FERC last week gave its blessing to the pending merger between Duke Energy and Cinergy Corp. and also signed off on MidAmerican Energy Holdings Co.'s (MEHC) bid to buy PacifiCorp from Scottish Power. Meanwhile, Wall Street was abuzz over reports that FPL Group, the parent company of Florida Power & Light Co. (FP&L), was in advanced talks to purchase Constellation Energy Group for more than $11 billion.

The Duke-Cinergy merger and MEHC's acquisition of PacifiCorp were reviewed by FERC under the Federal Power Act's Section 203 provisions in place prior to enactment of the Energy Policy Act of 2005, which changed the statutory merger test. The Energy Policy Act provided that the changes to the merger test do not apply to merger cases pending when the law was enacted, as were these transactions.

In both the Duke-Cinergy and MidAmerican-PacifiCorp transactions, the Commission found that the proposed mergers and dispositions of jurisdictional facilities satisfy the FERC criteria and are consistent with the public interest.

Addressing the Duke-Cinergy deal, FERC Chairman Joseph Kelliher noted that the merger "was examined under the merger policy statement test, which considers the impact on competition, rates, and regulation. The Commission concluded the merger will not harm competition in any relevant market and will not have an impact on rates or regulation. This merger is significant in size, but the merger analysis was straightforward."

He noted that merger analysis "focuses on potential harm caused by the merger, not pre-existing conditions. There is very little overlap between the Cinergy and Duke markets. MISO [Midwest Independent Transmission System Operator] is an unconcentrated market. The Duke market is highly concentrated, but is not made more concentrated by the merger."

In its order, FERC also approved the transfer of Duke's ownership of merchant generation facilities in the Midwest to Cincinnati Gas & Electric (CG&E), a Cinergy unit.

Under the transaction approved by the Commission, Charlotte-based Duke Energy and Cinergy, based in Cincinnati, will combine to create a company with more than $70 billion in assets and operations in two-thirds of the United States and parts of Canada. The merged companies will have retail electric and gas customers in Kentucky, Indiana, North Carolina, Ohio, South Carolina and Canada, and own more than 45,000 MW of electric generation and 17,500 miles of natural gas transmission pipeline.

In November, regulators in South Carolina and Kentucky approved the merger. And in August, the companies satisfied Federal Trade Commission and U.S. Department of Justice review under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

On Thursday, PSI Energy Inc., the Indiana utility subsidiary of Cinergy, filed with state utility regulators a settlement agreement in the planned merger of Cinergy and Duke. The settlement is with the staff of the Indiana Utility Regulatory Commission (IURC), the Indiana Office of Utility Consumer Counselor and the PSI Industrial Group. The settlement still needs IURC approval.

Some of the key elements of the agreement include:

Also, as part of the agreement, PSI agreed not to pass on to customers any transaction costs associated with the merger and to discontinue in 2008 the recovery of costs from the company's 1994 merger to create Cinergy.

On Friday, Cinergy and Duke announced that they filed with the Public Utilities Commission of Ohio a proposal to resolve all issues related to the commission's review of the companies' planned merger.

State regulators in North Carolina are reviewing a settlement agreement reached between the companies and the public staff of the North Carolina Utilities Commission.

The merger remains subject to other closing requirements, including approvals from the Nuclear Regulatory Commission, the Federal Communications Commission, and shareholders of both Duke Energy and Cinergy. The companies anticipate receiving all necessary approvals in the first half of 2006.

Separately, FERC approved MEHC's $5.1 billion acquisition of Portland, OR-based PacifiCorp. "As staff indicated, the MidAmerican and PacifiCorp markets are remote from each other," Kelliher said. "The two companies control very little capacity outside the respective control areas, so it's a very straightforward matter to conclude that there is no harm to competition."

FERC Commissioner Suedeen Kelly noted that the MEHC-PacifiCorp deal offers up a "significant benefit" to the Northwest. "PacifiCorp's region in the Northwest clearly needs an infusion of capital into infrastructure improvement and MidAmerican has that capital and has significant access to that capital and that will be a benefit to the customers in the Northwest."

FERC Commissioner Nora Brownell noted that while she supported approval of both transactions, from a broader perspective, she thinks that "we don't ask the right questions generally about mergers." Customers and local policymakers "are often left with the impression that there is really no value added."

Brownell encouraged energy companies involved in mergers "to start talking about what value they have brought to customers. Not where the headquarters are, which is important if you're governor, but not necessarily if you're a customer. Not how many employees there are in each state..."

Merging companies should "look at larger issues. Do these mergers of now well-capitalized companies bring increased investment in infrastructure? What difference does that make to the customer? Are there efficiency gains in generation and delivery, and let's talk about those. Is there expertise that the combined companies have that bring value to the overall management of the company?"

Rather than "simply approve mergers and walk away, I would really ask the companies [to] come back to us in a year, come back to us in two years and let's talk about what you've brought to the customers so we begin looking at mergers in the larger context," Brownell added. "Because when I see what happens at the state level and local approval level, I feel that they are not necessarily looking at what's best for the customer, but what's best for narrow, parochial interests, and I think it behooves the companies to start talking about those issues."

MidAmerican, headquartered in Des Moines, IA, is an exempt public utility holding company providing electric service to over 698,000 customers in Illinois, Iowa and South Dakota. PacifiCorp, operating through two regulated subsidiaries, serves electric customers in parts of California, Idaho, Oregon, Utah, Washington, and Wyoming.

Oregon Public Utility Commission staff last month filed a recommendation against MEHC's bid to buy PacifiCorp. Oregon PUC staff indicated that it could change its recommendation to the three-member commission, if MidAmerican can offset the risks the staff has identified to the potential purchase.

Meanwhile, FERC may soon be faced with another merger-related application to consider. Investors awoke to news last Wednesday that FPL Group was is in advanced negotiations to purchase Constellation Energy Group for more than $11 billion. The New York Times broke the story.

FERC also used its last open meeting of 2005 to affirm a prior decision authorizing Exelon Corp.'s proposed merger with Public Service Enterprise Group Inc. (PSEG). In addressing the arguments raised on rehearing, the Commission emphasized that the proposed merger included mitigation measures to curb any competitive harm that might arise from the utilities' merger through "substantial divestiture of generation and several compliance filings."

Still pending before FERC is a merger application filed by NRG Energy and Texas Genco LLC. The companies in October asked FERC to act on the application no later than the end of January 2006

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