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The Federal Energy Regulatory Commission, the once-quiet agency that rose to prominence during the recent California crisis, has another big mess at its doorstep: the proposed merger of beleaguered Enron Corp. with smaller Dynegy Inc. The problem: Enron is too big to fail. And without the merger — as well as some emergency debt restructuring, according to recent U.S. Securities and Exchange Commission filings — Enron would collapse, energy industry experts say. And without Enron, the business of trading energy and marketing it in bulk could become vulnerable, they say. With the issues at stake so clear, FERC is under intense pressure to approve the deal swiftly, and without too much tinkering, experts say. But that could be impossible given the complexity of the deal. Dynegy and Enron, both based in Houston, announced the all-stock merger Nov. 9. At the time, the deal was valued at $24 billion. The companies have not yet filed applications with FERC. Enron was — and remains — in the midst of a freefall in its stock price after confirming SEC investigations into its financial disclosures and off balance sheet trading. “The consequences are onerous” if the deal falls apart, said Joel F. Zipp, a managing partner at Cameron McKenna in Washington, D.C., and a former FERC attorney. “I don’t think anyone can afford for this merger not to go through. A substantial part of the market is controlled by Enron, and if Enron goes away, so does the liquidity of the market,” said Zipp, who is not involved in the deal. Enron also pioneered the development of the financial services and risk management aspects of the industry, said Craig G. Goodman, president of the National Energy Marketers Association. “That was their forte,” he said. “They were like market makers.” Considering Enron’s prominent position in the industry, Goodman said he expects FERC to move quickly and to favor the deal. “FERC wants to bring stability to the marketplace,” he said. “The commission and the chairman [Bush administration appointee Pat Wood] knows these Texas companies and the marketplace well. I know Pat is committed to seeing this marketplace work.” FERC has its work cut out for it. Unlike many energy mergers that involve integrating physical assets and market territories, the proposed Enron-Dynegy merger involves all that and more, namely dealing with unregulated businesses such as the trading and marketing of energy. This is the first time such businesses, especially on such a mammoth scale, will come before FERC as part of a merger. Furthermore, it’s the first time the regulators will have oversight — under the guise of its merger review authority — over how these unregulated businesses will be conducted going forward. The proposed merger “may present some issues, if not problems, that FERC has not seen so far,” said an industry source close to FERC, who asked not to be identified. Furthermore, FERC, which has reviewed upward of 60 energy deals in the past five years, is accustomed to looking at mergers proposed for strategic purposes or to create efficiencies. The Enron deal doesn’t fall in either category, the industry source noted. The proposed merger “is where Enron ended up after the loss of confidence in the way it has conducted its business,” the source said. “There was a huge loss in value, Enron needed a capital infusion, and Dynegy was there and interested.” Enron’s bad news has not ended with the merger agreement. In a recent SEC filing, the company said it would have to repay $690 million in debt by Tuesday if it does not come up with collateral for a loan. Additionally, the company has debt repayments and other obligations of $9.15 billion due by the end of next year. FERC should be capable of handling the unusual circumstances of the deal and the pressure to approve, the source said. “This is all part of the industry’s shifting landscape,” he said. Copyright (c)2001 TDD, LLC. All rights reserved.

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