Electric rate freeze is vowed BGE and Pepco make several pledges in bid to get merger OK'd

April 09, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Baltimore Gas and Electric Co. and Potomac Electric Power Co. have pledged to freeze base electric rates to Maryland and Washington, D.C., customers through the end of the decade in exchange for state approval of their $2.9 billion merger, according to documents filed yesterday.

The pending Constellation Energy Corp. also proposes crediting customers' bills if certain financial targets are met, and enhancing low-income and economic-development programs as part of the corporate marriage, according to filings with the Public Service Commissions of Maryland and the District of Columbia.

"[BGE and Pepco] believe that the proposed merger is in the public interest, and request that the commission make such a finding and authorize the merger," the utilities wrote in their joint filing. "The rates for electric service will be lower than they would have been absent a merger, and the new company will be better positioned to meet the energy needs of Maryland's consumers in the future." BGE's last electric base rate increase was in April 1993, when the Maryland PSC granted a 3.8 percent increase. That jump provided the company with $86.5 million in additional annual revenues.

At the time, BGE had requested a 7.4 percent increase, which would have generated $169.4 million in revenue. The company declined to speculate whether electric base rates would increase without the merger.

The applications with the respective PSCs -- the agencies that regulate energy concerns -- represent the latest hurdle in BGE's and Pepco's effort to create the nation's ninth-largest utility.

On Friday, BGE and Pepco applied to the federal Nuclear Regulatory Commission to transfer the license on BGE's two-unit Calvert Cliffs nuclear power plant to Constellation Energy Corp., the entity the companies hope to create by March 1997.

BGE and Pepco stockholders voted to approve the merger late last month.

Unlike the BGE-Pepco applications filed with the Federal Energy Regulatory Commission, though, the Maryland and D.C. commissions are expected to closely scrutinize Constellation's proposed rate schedules before granting their blessing of the union.

In addition to the rate freeze, Constellation's shareholders and 2.9 million electric customers would receive rebates if the utility exceeds a targeted 13 percent return on equity.

Failure to achieve expected savings or unanticipated costs would be borne by investors, the filing stated. BGE's current return on equity on electric base rates is 11.4 percent.

The freeze would have no effect on rates for the 550,000 natural gas customers in BGE's 600-square-mile service territory.

Utility analysts said the rate freeze was both fair and justified.

"Every year, it costs more to do business," said Ronald S. Tanner, an industry analyst with Legg Mason Wood Walker Inc. in Baltimore. "So, if they freeze rates, they're effectively giving customers lower rates.

"And I would expect the PSC to require a decrease after the freeze, after Constellation has time to recover the costs of executing the merger. The savings will be substantial, but they'll occur over time. In the first five years, the savings aren't that significant, so a freeze reflects that."

Eventually, Constellation plans to establish uniform rate schedules for both Maryland and D.C. residents, a move that had been expected as the two separate companies became one. The filing was not specific about a timetable for rate integration.

The Maryland Office of People's Counsel, the state agency that works as an advocate for residential customers, intends to study the freeze proposal to see if it is adequate. "From my perspective, rate payers need to get tangible benefits from this merger, because it will have an impact on potential competition," said Michael J. Travieso, the People's Counsel. "They'll be the only provider of power and they'll control all the distribution lines, and they plan to save over a billion dollars. We plan to look very closely at the numbers."

In all, Constellation plans to save $1.3 billion through 2007 by eliminating 10 percent of its combined work force, cutting duplicated functions, and integrating various power generation and transmission functions.

"The approach we have taken to this merger in creating a single integrated company will allow us to capture the greatest amount of savings," BGE Chairman and Chief Executive Christian H. Poindexter said in a prepared statement.

Under the merger plan, Constellation also would contribute $21.1 million to finance economic development and low-income resident programs annually, up from roughly $12 million. BGE's Maryland customers would receive $16 million of that total, and Pepco's economic-development and low-income programs would increase to $5.1 million. The disparity in programs occurs because 80 percent of Constellation's electric revenues would be generated by Maryland residents, said Arthur J. Slusark, a BGE spokesman.

Chrys Wilson, a Maryland PSC spokeswoman, said the agency's staff is reviewing the application and will make written comments on it in the near future. After those comments have been submitted, the five-member PSC will schedule a series of hearings on the merger.

Pub Date: 4/09/96

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