Pa. utility calls off Allegheny merger DQE cites denial of cost recovery for Md. company

July 29, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

A Pittsburgh-based utility company abruptly called off its pending merger with Allegheny Energy Inc. yesterday, after regulators balked at a plan to give the team more than $1 billion in "stranded cost recovery."

DQE Inc.'s decision to terminate the $2.6 billion merger stems from Pennsylvania's decision to eliminate a significant portion of the controversial power plant expenses that Hagerstown-based Allegheny had sought as part of a shift to a deregulated electric industry.

"A mutual termination would permit both companies to return to business in the ordinary course and devote their full attention to a timely implementation of retail choice in Pennsylvania," DQE President and Chief Executive Officer David D. Marshall wrote in a letter to Allegheny's top executive.

Allegheny countered that DQE is "incorrect" in its assessment of the impact of the regulators' stranded-costs decision and that it "stands firmly behind the merger and will continue to work toward completing it without delay."

DQE, the parent of Duquesne Light Co., and Allegheny agreed in April 1997 to join forces and create a power company with $10.6 billion in assets and 2 million customers in Maryland, Pennsylvania, West Virginia, Virginia and Ohio.

DQE and Allegheny also said their company could save $1 billion over five years, and benefit consumers with an array of energy-related products and services.

Pennsylvania's Public Utilities Commission stymied the deal when it recently disallowed roughly $1 billion in stranded costs that Allegheny had requested. By contrast, the regulators permitted Duquesne Light to recover all but $140 million of the nearly $1.4 billion it is seeking.

Utilities such as DQE and Allegheny -- which has filed two lawsuits challenging the Pennsylvania PUC order on stranded costs -- are seeking payments for the cost of power plants and power contracts that haven't been fully depreciated during the transition to a competitive market.

Pennsylvania is one of several states -- including Maryland -- that are grappling with ways to deal with stranded costs and fairly open traditionally monopolized electricity markets to competition.

Locally, regulators are expected to decide by October 1999 on requests for nearly $2 billion in stranded costs. Allegheny's request in Maryland amounts to $241 million.

While DQE said it would back out of the merger regardless of what Allegheny decided, it asked its suitor to agree to end the deal by mutual consent.

The Allegheny-DQE merger had been approved by the Pennsylvania PUC, the Maryland Public Service Commission and the Nuclear Regulatory Commission, along with shareholders from both companies.

DQE said it would "exercise its rights to terminate the agreement unilaterally not later than Oct. 5 if circumstances do not change sufficiently to remedy the adverse effects" of the Pennsylvania PUC's order.

Without a merger, Allegheny Power and DQE probably will become competitors, especially as Pennsylvania edges closer to retail competition by January 2001.

Pub Date: 7/29/98

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