FTC Negotiates Settlement to Preserve Competition in Distribution of Electricity and Natural Gas in Detroit Area

The Federal Trade Commission has negotiated a proposed consent order to remedy the alleged anticompetitive effects stemming from the plan of MCN - the parent of Michigan Consolidated Gas Company ("MichCon"), to merge with a subsidiary of DTE - the parent holding company of The Detroit Edison Company ("Edison"). Edison is a public utility engaged in the generation, purchase, transmission, distribution and sale of electricity in southeastern Michigan, including the city of Detroit. MCN is a natural gas utility serving communities throughout the State of Michigan. MichCon distributes natural gas, and Edison distributes electricity, in a portion of southeastern Michigan consisting of the city of Detroit and all or parts of Macomb, Monroe, Oakland, Washtenaw, and Wayne Counties (the "Overlap Area"). Including the assumption of debt, the transaction is valued in excess of $4.0 billion.

The proposed settlement is designed to resolve the FTC's concerns that the merger of DTE and MCN would lessen competition in the local distribution of electricity and the local distribution of natural gas in the Overlap Area. It would allow the merger to proceed but require DTE/MCN to divest certain assets to Exelon Energy Company ("Exelon") pursuant to and in accordance with the terms of a Divestiture Agreement between MichCon and Exelon, no later than five days after the proposed merger is consummated. Exelon is an energy company formed from the merger of Unicom Corporation (the parent of Commonwealth Edison, the utility that serves Chicago and northern Illinois) and PECO Corporation, a major utility in the Northeast.

According to Molly Boast, Acting Director of the FTC's Bureau of Competition, "By encouraging the use of natural gas for cogeneration and other uses where it competes directly with electricity, MichCon provides the only effective alternative to Detroit Edison for many customers who are able to use either natural gas or electricity for their energy needs. This divestiture will bring competition to an industry -- natural gas distribution -- that has traditionally been viewed as a natural monopoly, ensuring a viable competitive alternative in Southeast Michigan, particularly for applications such as cogeneration and distributed generation."

According to the complaint, MichCon is the only distributor of natural gas within the Overlap Area. Except for the cities of Detroit and Wyandotte, which operate their own municipal electric utilities, Edison is the only distributor of electricity within the Overlap Area. Following the merger, the FTC alleges, Edison would effectively control the distribution of both electricity and natural gas within the Overlap Area. In addition, entry into the distribution of electricity and the distribution of natural gas within the Overlap Area is effectively blocked by regulatory constraints, and would not be timely, likely or sufficient to prevent anticompetitive effects that may result from the merger.

The complaint describes three ways in which the proposed merger would lessen competition.

Self-Generation of Electricity

According to the complaint, natural gas is the fuel of choice for new electricity generation in the Overlap Area. Other fuels are not likely to be used for new electricity generation because of various disadvantages relative to natural gas. Coal and fuel oil, for example, have environmental problems that do not exist with natural gas. As a result, virtually all new electricity generation in the Overlap Area is likely to rely on natural gas as its source of fuel.

The complaint states that customers in the Overlap Area who need electricity have limited options. They can have electricity delivered by Edison, or they can self-generate electricity using natural gas delivered by MichCon. Self-generation can take several forms, including cogeneration, generation by municipalities (such as the city of Wyandotte), and emerging forms of distributed generation, such as microturbines and fuel cells, that are fueled by natural gas. According to the complaint, MichCon has aggressively sought to encourage customers to install gas-powered self-generation equipment that would allow customers to minimize or eliminate the purchase of electricity from Edison.

The complaint charges that DTE and MCN are competitors in the Overlap Area because Edison distributes electricity and MichCon distributes natural gas used for the self-generation of electricity. The complaint further alleges that the proposed merger may substantially lessen competition or tend to create a monopoly in the distribution of electricity and natural gas in the Overlap Area in certain ways, including: (1) by eliminating competition between DTE and MCN in the distribution of electricity and the distribution of natural gas used for the self-generation of electricity in the Overlap Area, and (2) by increasing the likelihood that market power will be exercised in the Overlap Area in connection with the distribution of electricity and the distribution of natural gas used for the self-generation of electricity, each of which increases the likelihood of anticompetitive prices and reduced competition in the distribution of electricity and the distribution of natural gas in the relevant market.

The City of Detroit

The city of Detroit operates a municipal utility (the Public Lighting Department, or "PLD") that distributes electricity to industrial, business and public sector customers in Detroit. The PLD competes directly with Edison for new non-residential customers in Detroit.

According to the complaint, the PLD has two sources of electricity. It purchases some power at wholesale, which is delivered over Edison's power lines, and it generates the rest of its requirements using natural gas delivered by MichCon. The PLD has no viable option for natural gas delivery other than MichCon, and after the merger will have to rely on its only direct electricity competitor for delivery of natural gas.

The complaint charges that the proposed merger, if consummated, may substantially lessen competition or tend to create a monopoly in the distribution of electricity in the city of Detroit in certain ways, including: (1) by decreasing or eliminating competition in the city of Detroit in the distribution of electricity and the distribution of natural gas used to produce electricity, and (2) by facilitating DTE's ability to raise the costs of the Detroit PLD, each of which increases the likelihood of anticompetitive prices and reduced competition in the distribution of electricity and the distribution of natural gas used to generate electricity in the city of Detroit.

Competing Applications

Electricity and natural gas compete directly for certain commercial and industrial applications. According to the complaint, some customers can choose either natural gas or electricity for specific energy needs, such as powering air compressors, commercial cooking, and various process applications. Customers who choose natural gas for these applications must use natural gas delivered by MichCon, and customers who choose electricity must use power delivered by the local electric utility, usually Edison. MichCon has aggressively sought to convert customers using electricity for such applications to natural gas, typically by attempting to convince customers of the relative economic benefits of natural gas compared to electricity.

The complaint charges that the proposed merger, if consummated, would substantially lessen competition or tend to create a monopoly in the distribution of electricity and natural gas in certain ways, including: (1) by eliminating competition between DTE and MCN in the distribution of electricity and the distribution of natural gas in the Overlap Area, and (2) by increasing the likelihood that market power will be exercised in the Overlap Area in connection with the distribution of electricity and the distribution of natural gas, each of which increases the likelihood of anticompetitive prices and reduced competition for the distribution of electricity and the distribution of natural gas in the relevant market.

The proposed settlement to remedy the Commission's competitive concerns about the merger allows the transaction to proceed but would require DTE/MCN to divest certain assets to Exelon no later than five days after the proposed merger is consummated. Exelon is one of the largest suppliers of electricity and natural gas in the nation and it currently markets natural gas to buyers in Michigan (as well as in other states), and has an affiliate that is engaged in the distribution of microturbines and distributed generation equipment.

The Divestiture Agreement consists of two separate agreements: (1) an "Easement Agreement" entered into between MichCon and Exelon, and (2) an "Auditor Agreement" entered into between MichCon, Exelon, and a third party that serves an oversight function with respect to the Easement Agreement between MichCon and Exelon.

The Easement Agreement conveys to Exelon an easement over MichCon's local natural gas distribution system that will allow Exelon to engage in the distribution and storage of natural gas in the Overlap Area. The Easement Agreement contains a number of provisions designed to ensure Exelon's ability to be a viable competitor. In particular, the agreement requires the parties to appoint an independent third-party auditor with knowledge of the natural gas industry to oversee the Easement Agreement and to perform such services as are necessary to effectuate the agreement, including arbitration of disputes and other duties and responsibilities designed to ensure that MichCon cannot discriminate against Exelon. Moreover, the Agreement requires that MichCon give Exelon and the Auditor advance notice of important operational events that may impact the distribution system, such as scheduled maintenance, outages, changes in operating standards, planned new receipt points, proposed modifications to nomination or measurement practices or quality specifications, and any other events that may affect Exelon or Exelon's ability to service its customers, and empowers the Auditor to revise or modify any such events if necessary to prevent an adverse impact on Exelon.

The proposed settlement also contains other provisions designed to ensure the continuation of a viable and competitive alternative supplier of natural gas distribution services in the Overlap Area.

The proposed settlement provides that, for two years after the date the Order becomes final, DTE/MCN shall promptly comply with any request of any customer in the Overlap Area to terminate its transportation or distribution contracts with MCN, without cost or penalty to such customer, to enable such customer to purchase gas distribution or transportation services provided by Exelon.

Further, the proposed settlement also contains provisions dealing with the appointment of an alternative acquirer if Exelon terminates the Divestiture Agreement, as well as trustee provisions dealing with the responsibilities of any trustee appointed to accomplish any divestiture required by the order.

An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. It will be subject to public comment for 30 days, until April 23, 2001, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The Commission vote to place the complaint and proposed settlement on the public record was 5-0.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, proposed consent agreement, and an analysis of the agreement to aid in public comment are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; toll-free: 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No.: 001 0067)