The Federal Trade Commission (FTC) approved the merger ofDominion Resources Inc. and Consolidated Natural Gas Co. (CNG)provided Dominion divests CNG subsidiary Virginia Natural Gas Inc.(VNG) to alleviate anticompetitive effects. Dominion, throughsubsidiary Virginia Power, accounts for more than 70% of allelectric power generation capacity in the Commonwealth of Virginia.CNG, through its ownership of VNG, is the primary distributor ofgas in southeastern Virginia. The proposed acquisition is valued atabout $5.3 billion.

“The market for the generation of electric power in southeasternVirginia is highly concentrated, and the agreement will allow forentry into this marketplace by other potential competitors, saidRichard G. Parker, director of the FTC Bureau of Competition.

Virginia, following the lead of other states such asPennsylvania and Massachusetts, will begin electric deregulationJan. 1, 2002. Currently, the state’s electric generation isregulated by the Virginia State Corporation Commission and theFederal Energy Regulatory Commission.

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.

Dominion would have one year to divest VNG. Under the FTC’sproposed 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 merger has been approved by regulators in Virginia,Pennsylvania, Ohio, North Carolina and West Virginia. Still pendingare approvals by the Federal Energy Regulatory Commission and theSecurities and Exchange Commission, which are expected by year end.The merger is expected to close in the first quarter of 2000.

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