Marking the second time it had approved a union between an electric utility and a natural gas pipeline company since issuance of its December 1996 merger policy, the Federal Energy Regulatory Commission has approved the merger of Duke Power Co. with PanEnergy Corp.

In its 21-page order issued May 28, the FERC found the merger consistent with the public interest based on an examination of the effect it would have on rates, competition and regulation (Docket No. EC97-13-000). The FERC concluded that the generating facilities owned by Texas-based PanEnergy are small and are such a great distance from Duke's North Carolina market that it will not affect market concentration. "Geography matters," summarized Commissioner William L. Massey.

Also, the FERC found that the merger would not increase control over electric transmission assets because, with one exception, all transmission facilities owned by the two companies would fall under Duke Power's open-access tariff.

The FERC's quick action on Duke/PanEnergy offers a marked contrast with long delays encountered by Northern States Power Co. and Wisconsin Electric Power, which, after nearly two years, eventually saw their proposed Primergy merger fall apart.

FERC Commission William Massey, speaking at the Washington International Energy Group in Washington, D.C., on May 19, noted the delays in the Primergy case, among other points.

Massey said, "We have not processed these mergers in a timely fashion and I'm sorry about that." But he promised that FERC will do better. However, Massey pointed out that the FERC had legitimate market power concerns, and, "I make no apologies for that." He added that the pending departures of Chair Moler and Commissioner Santa would not hold up any mergers.

FERC Commissioner Donald F. Santa Jr., speaking on May 22 at a conference in Arlington, Va., sponsored by PUBLIC UTILITIES FORTNIGHTLY, "Restructuring & Convergence: Successful Strategies in the Energy Services Marketplace," agreed with Massey that the Primergy merger approval took too long. Santa observed that "22 months is not something to be proud of and we've got to do better." He noted that the FERC's merger policy statement aims for a 12- to 15-month approval process.

Another issue in the Duke/PanEnergy case concerned vertical market power (em whether PanEnergy's control of gas pipeline facilities could affect gas supplies and prices for gas-fired generators competing in Duke's electric market. Such market power could have derailed the merger, just as occurred in the Primergy case.

Yet the FERC found no indication that PanEnergy could restrict natural gas supply through control over natural gas transportation services, driving up costs to Duke's competitors. In fact, most of Duke's competitors in wholesale electric generating markets appeared to be coal-fired and nuclear-based utilities. Also, the FERC believed that enough gas pipelines existed to serve the merged company's present and future gas-fired competitors.

Commissioner Donald F. Santa Jr. differentiated the Duke Power merger from the derailed Primergy merger, which involved two electric utilities. That deal was caught up in regulatory delays and market power concerns because it was announced before the FERC's December 1996 electric utility merger policy statement, though reviewed under the new guidelines. By contrast, Santa pointed out the Duke Power merger application was filed in early 1997, after the new merger policy was in force. That deal, said Santa, shows that when the circumstances are right, the FERC's approval can come easily. Commissioner Massey added that the FERC's merger policy statement merely touched on nontraditional "convergence" mergers, involving electric distributors and gas pipelines.

Massey added, "My own view is that the merger policy statement does not work well with gas and electric mergers." He pointed out that these mergers involve more traditional vertical integration problems, and not market dominance problems.

The FERC's Duke/PanEnergy decision marks the second time in recent months the commission has approved a merger between a vertically integrated electric utility and a gas company owning pipeline facilities. In February, the commission approved a similar convergence merger between Enron and Portland General Electric. In that ruling, the FERC also declined to find that gas pipeline facilities conferred market power in electric generating markets.

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