The $6.4 billion merger of Dominion Resources and ConsolidatedNatural Gas (CNG) picked up approvals from the Federal TradeCommission (FTC) and the Federal Energy Regulatory Commission(FERC) last week, but both agencies included conditions to protectcustomers in Virginia.

The FTC said Dominion must divest CNG subsidiary VirginiaNatural Gas (VNG) to alleviate anticompetitive effects. Dominion,through subsidiary Virginia Power, accounts for more than 70% ofall electric power generation capacity in the Commonwealth ofVirginia. CNG, through its ownership of VNG, is the primarydistributor of gas in southeastern Virginia. The FTC divestiturewas nothing new since the two companies said last August they wouldagree to the same divestiture condition imposed by the VirginiaCorporation Commission.

The merger partners also say they will agree to FERC’s conditionto mitigate concerns that swapping information among affiliateswould give Virginia Power a leg up in the generation market. TheCommission is requiring the entire corporate family to adhere toits Order 497 Standards of Conduct. These preclude the transfer ofcompetitive market information between affiliates. FERC broadenedits use of the standards with this decision. Previously it had onlyapplied to gas companies.

“…[W]e are concerned not just with the potential for abusebetween CNG and affiliated marketers, but also with the potentialfor abuse between any combination of the energy companies thatwould be affiliated under the proposed transaction,” the ordernoted. The two companies also agreed to hold an open season beforeCNG Transmission constructs new pipeline facilities to serve agenerator owned by any affiliate and adopt an open-tap policy withrespect to gas transportation provided by CNG Gas Transmission.

Regarding divestiture of VNG, the FTC Bureau of Competition,through its Director Richard G. Parker, said “The market for thegeneration of electric power in southeastern Virginia is highlyconcentrated, and the agreement will allow for entry into thismarketplace by other potential competitors.”

Virginia, following the lead of other states such asPennsylvania and Massachusetts, will begin electric deregulationJan. 1, 2002.

According to the commission’s complaint, the proposed mergerwould combine the dominant provider of electric power in Virginiawith the primary distributor of gas in southeastern Virginia. Thecomplaint also alleges that entry into the electric powergeneration market in southeastern Virginia by companiesunaffiliated with Dominion may be deterred because of Dominion’scontrol over VNG. Such control would likely deter or disadvantage anew entry into the marketplace as Dominion could exerciseunilateral market power to raise the cost of entry and productionor otherwise gain a competitive advantage.

The market for gas delivery in southeastern Virginia is alsocharacterized by high barriers to entry. According to the FTCcomplaint, it would be both costly and time-consuming for other gastransportation companies to extend pipelines from their existingnetwork to southeastern Virginia. In addition, other pipelines nearthe area lack sufficient excess capacity to support a new pipelinein southeastern Virginia, while VNG has substantial excesscapacity. The Commission contends that new entry into the gasmarketplace is unlikely to deter or counteract the anticompetitiveeffects of the transaction.

Both the state commission and the FTC will give Dominion wouldhave one year from the date of the merger to divest VNG. Under theFTC’s proposed order, any acquirer of VNG would be subject to theCommission’s approval. If Dominion is unable to find a suitablepurchaser, the stipulation requires Dominion to spin off VNG to itsshareholders. The FTC’s proposed consent agreement would alsoprohibit any Dominion shareholder from receiving more than 5% ofthe voting shares of VNG. The agreement will be subject to publiccomment until Dec. 7, after which the commission will decidewhether to make it final.

The favorable government decisions follow on approvals in fivestates. Only the Securities and Exchange Commission is left toweigh in. The merger is expected to close in the first quarter of2000.

Joe Fisher, Houston

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