Government Approves Merger of Energy Giants

Though most expected the Economics Ministry's approval, the decision on Friday to allow the electric utility and natural gas giants E.On and Ruhrgas to merge marked the end of a long struggle for the two companies.

In January, the Federal Cartel Office ruled against the acquisition out of fears E.On would become a monopoly player in Germany's natural gas and electricity markets. The combined companies would control 60 percent of the gas market and a third of the electricity market, and regulators said that would strangle the competition.

The companies petitioned the rejection to the Economics Ministry, and as he overturned the Cartel Office ruling on Friday, Undersecretary Alfred Tacke said the merger would help reduce price fluctuation in the natural gas market and help to ensure continuous supplies rather than stymie competition.

"We have increased market competition," Tacke said on Friday. "This will intensify over the next few years. We need strong buyers dealing directly with natural gas producers, and improved access to natural gas production."

Under normal circumstances, the Economics Minister would have issued the decision, but Werner Müller recused himself from the review process because he formerly served as an executive of VEBA, an energy supplier that merged with Viag in 2000 to form E.On.

The Economics Ministry rarely overrules the Cartel Office, but it can do so in cases where the economic advantages trump competitive factors or the merger is in the public interest. Natural gas supplies are always a sensitive political subject in Germany, which imports 80 percent of its natural gas – predominantly from Russia and Norway. And efforts to maintain sufficient supplies were an important consideration in the decision.

He said the merger would provide Ruhrgas with the ability to increase its share in Gazprom, Russia's state-run natural gas supplier. Ruhrgas currently holds a close to 5 percent stake in the company.

The ministry attached strict conditions to the merger – forcing Ruhrgas to sell its shares in the eastern German natural gas provider Vebundnetz Gas AG (VNG). VNG has annual revenues of €3 billion ($2.91) and will continue to operate as an independent company. Additionally, the government is ordering E.On to give 75 billion kilowatt hours, or about five percent of its annual natural gas supply, to its competitors.

E.On executives criticized the regulators' demands, decrying them as "far-reaching" and "painful," but said the company would nonetheless accept them.

Executives have also agreed to invest, in the medium term, €6 to €8 billion ($5.83 billion - $7.78 billion) in infrastructure, exploration and production for its natural gas businesses.

The Economics Ministry says the merger of E.On with Ruhrgas will spur competition in the sector. A handful of energy giants – including British Petroleum, ExxonMobil and Shell – will now sell their shares in Ruhrgas and could enter into the German energy market on their own in the future. British Petroleum has already stated its ambitious goal of cornering 20 percent of the German market.

Consumer groups are less sanguine about what the merger will bring. The German Association of Energy Consumers is threatening to sue the government. Other groups say Germans should expect higher energy prices for consumers as a result of the deal.