BGE-Pepco merger threatened Firms vow to cancel deal if order to trim rates isn't rescinded

State ruling at issue

Md. regulators made cuts a condition of approving plans

April 18, 1997|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Baltimore Gas and Electric Co. and the Potomac Electric Power Co. threatened yesterday to call off their planned merger unless Maryland regulators rescind an order for a $56 million-a-year rate cut and other concessions.

"We hope to have the Public Service Commission revise its decision because the order would result in an unacceptable financial impact on the new company and the merger could not proceed," BGE Chairman and Chief Executive Christian H. Poindexter and Edward F. Mitchell, Pepco's chairman and CEO, said in a joint statement.

Under a state order, issued Wednesday in conjunction with approval of the merger, BGE and Pepco would have to freeze base rates for three years in addition to trimming rates by $56 million.

Also, the proposed Constellation Energy Corp. would be unable to recoup from customers tens of millions of dollars in costs for power purchased from other utilities, and be forced to split profits with customers.

Pepco and BGE, which intend to file a formal request with the PSC next week to reconsider the order, claim the commission's conditions would "eliminate any reasonable opportunity for shareholders to share in the benefits" of the corporate union.

Although it is unclear exactly how customers would be affected if the merger plan is terminated, it is likely both BGE and Pepco would seek rate increases from regulators in both Maryland and Washington.

Late last year, in testimony before the District of Columbia PSC, Pepco President John M. Derrick Jr. threatened that Washington's electric rates would likely rise significantly if the merger, which would create the nation's ninth largest energy company, didn't reach fruition.

Neither PSC Chairman H. Russell Frisby Jr. nor Michael J. Travieso, head of the state's citizens advocacy group, the Office of People's Counsel, could be reached for comment on the BGE-Pepco statement.

As part of the PSC order, though, Frisby wrote: "I believe that the proposed merger is a historic one that will be beneficial for both ratepayers and the state. Clearly, the regulatory and competitive environment in which energy companies provide service is quickly changing, and the [BGE and Pepco] proposed merger reflects that change."

Industry analysts were divided on whether the state order would kill the merger plan, noting that utilities and the commission often take bold public stands in an effort to gain concessions while negotiating rates and other matters.

The dispute between BGE-Pepco and the PSC is similar to one occurring 3,000 miles away, between the Oregon Public Utility Commission, its version of the state's PSC, and Enron Corp. Earlier this week, the Houston-based utility company revised a bid to buy Portland General Corp. by offering to slash customer rates by $141 million. The Oregon regulators' staff last week called for its commission to reject the $3 billion deal because it involved only a $61 million rate reduction. A decision from the Oregon PUC is expected in early June.

"People talk a lot about future deregulation, but the transition between then and now isn't talked about as much," said Lawrence Makovich, a director in the North American power group at Cambridge Energy Research Associates, a Massachusetts firm that provides information and consulting to utilities.

"This is a good example of the gray area people aren't focusing on," Makovich said of the friction between the PSC and BGE/Pepco. "And it's a prime example of the differences that exist between a world partly market-driven and partly controlled by regulators."

He added that he believes BGE and Pepco might kill their merger plan if the state's conditions significantly whittle down the potential profits from such a combination.

But other analysts concluded that the tough rhetoric from BGE ** hTC and Pepco merely represents an attempt to force the state's hand, since the potential benefits of the merger would be too important for the utilities to relinquish.

"I think it's unlikely that ultimately the deal won't go through," said Alex Hart, a utility analyst with Ferris, Baker Watts Inc. in Baltimore. "I think they'll end up getting something somewhere in the middle of what they want and what the regulators want."

The state PSC's conditions stand in contrast to a ruling Wednesday by the Federal Energy Regulatory Commission, the government's top utility company regulator, which voted to bless the merger without any conditions.

"We need to ensure that [mergers] will not be anti-competitive. At the same time, it is equally important that we not impose a crushing regulatory burden on mergers," said Elizabeth A. Moler, FERC's chairwoman.

In September 1995, BGE and Pepco announced plans to merge through a $2.9 billion stock swap. The companies cited the benefits of pairing amid anticipated industry deregulation and competition. At the time, the two utilities said they would save $1.3 billion through 2007 by combining, savings that would at least partially be passed on to customers.

Constellation Energy, which would have annual revenue of more than $5 billion and assets in excess of $15.5 billion, also could take advantage of "economies of scale," serve a more diverse customer base than either BGE or Pepco alone and enhance its geographical presence, allowing the new company to compete effectively against out-of-state utilities.

If the merger is successful, Constellation would become the dominant energy company in the region, with 1.8 million electricity customers and about 550,000 natural gas customers.

"The whole purpose of the merger was to position and prepare the two separate companies for a future competitive environment," said Arthur J. Slusark, a BGE spokesman. "But this order puts us at a competitive disadvantage from where we are now. We thought we had provided an equitable return between shareholders and customers."

Pub Date: 4/18/97

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