PSC orders ended merger BGE, Pepco unhappy with giving 75% of savings to customers

December 24, 1997|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Although the official death certificate wasn't signed until Monday, Baltimore Gas and Electric Co. and a Washington utility essentially pulled the plug on their $3 billion merger on April 16.

That was the day that state utility regulators ordered the planned Constellation Energy Corp. to cut electric rates for Maryland customers by $56 million, freeze rates for the first three years after the merger and disavow $188 million in power purchases that had been absorbed by consumers, in exchange for their approval.

The conditions would have provided 75 percent of savings generated by the deal to customers, rather than the 50/50 split between customers and shareholders that BGE and the Potomac Electric Power Co. sought.

"The companies were surprised by the one-sidedness of the PSC's order," said a BGE source, who asked not to be identified. "If there was a miscalculation, it was there. They didn't expect to receive from Maryland what they considered to be an lTC unreasonable order."

Lost among a union lawsuit and the interminable delays it caused, that Wednesday in early spring sealed the fate of the BGE-Pepco deal by imposing financial conditions that the two companies refused to accept.

"One of the key events, in our opinion, was the inability of regulators to strike a balance between what was good for customers and what was good for the company," said Arthur J. Slusark, a BGE spokesman.

Maryland Public Service Commission Chairman H. Russell Frisby for his part, said Monday that he believed that the financial conditions imposed were reasonable to protect the public interest.

But BGE and Pepco misjudged other critical factors related to the merger as well, including the stamina and determination of the International Brotherhood of Electrical Workers Local 1900 -- a union literally fighting for its survival -- and the vitriol of the state's Office of People's Counsel, a citizens' advocacy group opposed to the merger from the beginning.

Specifically, an IBEW lawsuit in Baltimore County Circuit Court that challenged whether the deal was in the public interest added months to the process, and took merger approval away from the Maryland PSC and put it in the hands of the courts.

"The union court challenge wasn't something that had occurred in other mergers," said Michael Worms, an analyst of the utility industry with CS First Boston Corp.

The IBEW local's motivation was simple enough to understand: Had the merger reached fruition, it would have faced extinction, since BGE Chairman and Chief Executive Christian H. Poindexter was adamant that the nation's ninth-largest power concern should remain union-free to be more competitive.

The misjudgments by BGE and Pepco were somewhat understandable as well. Across the country, merging utilities' proposals to split savings evenly between customers and shareholders had been approved easily by regulators.

And in Maryland, BGE believed that its relationship with the PSC was a sound one, based on past rate cases and rulings involving the Calvert Cliffs Nuclear Power Plant, among others.

If the Maryland PSC's order came as a surprise to BGE and Pepco, however, it also paved the way for other regulators to seek concessions without standing alone, analysts said.

In the wake of the Maryland PSC decision, for instance, the District of Columbia PSC in late October ordered that Constellation would have to freeze rates for four years and rebate $100 million to customers, further eroding the $650 million shareholders were slated to receive.

"It was a combination of several things," Worms said. "But in the end, with all the uncertainties and the time expended, I guess they felt it was time to cut their losses and move on."

Pub Date: 12/24/97

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