The proposed merger of Dominion Resources Inc. (DRI) withConsolidated Natural Gas Co. (CNG) is making a lot of energy peoplein and around Virginia very nervous. So much so they have askedFERC to either reject the combination of the two companies outrightor place “stringent” conditions on the marriage.

They point to the vertical market dominance that would becreated by the marriage of DRI’s Virginia Electric and Power withCNG’s Virginia Natural Gas (VNG) distribution company, the twolargest energy providers in the state. Critics are especiallyconcerned because the marriage would come at a time when Virginiais expected to open its electric market to retail competition.

Specifically, protesters fear DRI’s Virginia Power – through VNGand CNG Transmission – would have control over the supply and priceof natural gas used in power generation, giving it an advantageover existing competitors and new entrants in the generationmarkets in the Mid-Atlantic and Southeast [EC99-81]. In addition,it would have access to the largest gas storage system in NorthAmerica, with almost 900 Bcf of capacity.

Some of the critics’ worries were deflected earlier this weekwhen DRI and CNG agreed to sell or spin off VNG in order to winVirginia regulators’ support for their merger. But concerns aboutVirginia Power’s potentially preferential access to gas supplylinger.

“Virtually all new electric generating capacity planned forinstallation in the Southeast and Mid-Atlantic regions isgas-fired. Acquisition of CNG’s gathering, storage and pipelinefacilities therefore will provide the combined DRI/CNG enterprisewith control over the key fuel source for new generation in theseregions. That control, in turn, will give the combined enterprisethe ability to gain advantages for Virginia Power in the downstreampower market,” said the Virginia Municipal Electric Association(VMEA). The association purchases bulk power from Virginia Power onbehalf of its members – municipals – and is dependent on theutility’s transmission system. Virginia Power currently has about13,600 MW of generation assets. The merger would increase that tomore than 20,000 MW.

If approved by FERC, a merged DRI/CNG would have “verysubstantial capability” to delay or block new market entrantsseeking to compete with Virginia Power for wholesale (and, in thenear future, retail) sales, VMEA contends. To prevent such marketabuses, it urged the Commission to require DRI/CNG to submit areport three years after the completion of the merger analyzing thewholesale power markets in and adjacent to Virginia Power’s servicearea. If abuses are found, FERC should be prepared to order”structural remedies,” such as the divestiture of the gastransportation assets of CNG Transmission in and around VirginiaPower’s territory.

Although not opposed to the merger per se, the New York PublicService Commission expressed concern that DRI would have access toinformation about CNG Transmission’s capacity expansion plans, thusgiving it an advantage in choosing “optimum generation sites.” Andit would have “favorable access” to upstream supplies of naturalgas, the commission said.

To mitigate these concerns, it urged FERC to require DRI andCNG, as a condition of merger, to adhere to standards of conductsimilar to those imposed on pipelines and their natural gasmarketing affiliates.

The owners of three gas-fired generation facilities – which haveCNG Transmission as their gas transporter – agreed with the NewYork regulators, and then some. DRI/CNG and affiliates “should beprecluded from sharing any information of a commercially sensitive,competitive or proprietary nature…,” said Doswell LimitedPartnership, Northeast Energy Associates and North Jersey EnergyAssociates. CNG “should be specifically precluded from sharing anyinformation with affiliates regarding gas usage patterns orpotential siting of competing gas-fired generation loads,” theytold FERC.

Additionally, CNG should be subject to a blanket prohibitionbarring it from favoring affiliated generation; prohibited fromusing its blanket construction certificate to build facilities foruse by affiliated generators; and prohibited from manipulatingstorage injection or withdrawal schedules to withhold pipelinecapacity from competing generators.

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