Merger of BGE, PEPCO may lead to rate reduction Utility customers likely to benefit from consolidation

Many layers of scrutiny

PSC's is but one of many agency approvals needed

September 26, 1995|By MICHAEL DRESSER | MICHAEL DRESSER,SUN STAFF

A rate cut for Baltimore-area customers is part of the price Baltimore Gas & Electric Co. and Potomac Electric Power Co. may have to pay for regulatory blessing of their proposed union.

Frank O. Heintz, former chairman of the Maryland Public Service Commission, said that is because state regulatory bodies generally ask utilities that want to merge to show that it will be beneficial to the ratepayers.

"The companies typically indicate that there will be some savings from the deal," said Mr. Heintz, now executive director of the American Gas Association in Washington.

Although BGE and PEPCO expect that their partnership will save $1.3 billion over 10 years, neither company was prepared to discuss future savings for rate payers.

But PEPCO Chairman and Chief Executive Edward F. Mitchell did say that he expects electric rates for PEPCO customers in Prince George's and Montgomery counties to "equalize" somewhat in the future. PEPCO customers in Washington, D.C., will be less affected, Mr. Mitchell said, because of differences in allocating rate bases and other factors.

Receiving the approval of the Maryland PSC is just one of several regulatory hoops the two utility companies will have to jump through in order to complete the merger they announced yesterday.

According to Edward Tirello, utilities analyst with NatWest Securities in New York, the proposed merger will also undergo review by the Federal Energy Regulatory Commission, the Antitrust Division of the Justice Department, the Securities and Exchange Commission, the Nuclear Regulatory Commission and the District of Columbia's Public Service Commission.

Mr. Tirello said it generally takes 12 to 18 months for a utility merger to receive all the necessary approvals. Indeed, BGE and PEPCO are projecting that the merger won't be completed until early 1997.

He said that some of the approvals are generally routine, notably those from the the SEC and the Justice Department, but that others will require the companies to meet important conditions.

Since April, the FERC had been requiring that utilities prepare plans to allow competitors "open access" to send power over their transmission lines. Commission spokeswoman Barbara Collins said the companies would have to comply with that requirement -- part of a federal policy of encouraging competition in the power industry -- to receive approval of the merger.

Ms. Collins said each proposed utility merger is scrutinized to determine whether it is in the public interest and whether the price paid is reasonable.

"The deals always work out," Mr. Tirello said. "The states get lower rates, FERC gets open access, and the shareholders do well, too.

Mr. Heintz, who left the PSC in April after 13 years as chairman, said he couldn't estimate how long the Maryland commission will take to render its judgment because the agency never dealt with a large utility merger during his tenure.

He said that other state commissions that have dealt with mergers have taken six months to a year to resolve the issues.

The PSC's review of the merged company's cost structure holds out more promise for BGE's customers than PEPCO's because the Baltimore company has the higher rates. An industry study shows that BGE charges residential customers $8.76 per winter kilowatt hour, while PEPCO charges $8.13.

Mr. Fulton said the commissioners would have the authority to allow higher rates for PEPCO customers but would be reluctant to do so. "That would work against our mandate, he said.

One matter that will be hanging over the proposed deal for months to come is the seemingly interminable case before the Maryland PSC regarding the allocation of costs for extra energy BGE had to buy while the Calvert Cliffs nuclear power plant was shut down in the late 1980s. The merged company would presumably inherit that liability, Mr. Fulton said.

BGE's maximum possible liability in the case, which Mr. Fulton said had filled most of a room with legal filings over the past two years, is about $458 million.

BGE spokeswoman Nancy Caplan said the company is arguing that it should be able to pass on all those costs to ratepayers.

Meanwhile, she said, the Maryland People's Counsel is asking that the company pay $400 million of the tab.

The PSC staff has recommended that the company pay $194 million, Ms. Caplan said.

Mr. Fulton confirmed most of those figures but said that BGE-sponsored witnesses had said the company could be held liable for $35 million.

Mr. Heintz said that while power company merger cases were unusual in the past, he expects to see many more in the years ahead.

"In the new competitive environment, there are a lot of questions whether small and medium-sized will be as competitive as larger companies," he said.

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