Speculation grows about BGE-Pepco merger


The electric utility industry, once the steadiest, stodgiest business around, is charged up for change.

A 3-year-old federal law that potentially gives customers more choices in electricity vendors has the $190 billion industry talking of competition, mergers, winners and losers.

The news last month that Northern States Power Co. would merge with Wisconsin Energy Corp. switched on the juice in both those companies' stocks and renewed analysts' predictions of similar alliances across the country.

"There's a lot of scuttlebutt going on in the industry nationally," said J. Steven Herod, director of energy-power regulation for the Federal Energy Regulatory Commission in Washington. "It's kind typical of the era we're in now."

In few places is speculation stronger than that involving Baltimore Gas & Electric Co. Stock analysts and BGE employees believe that the company may be considering a merger or other business combination with Washington-based Potomac Electric Power Co.

"Rumors of BGE and Pepco have circulated on and off for a number of years," said Alex Hart, utility analyst for Ferris, Baker Watts Inc. in Baltimore. Lately, though, he said, "apparently it's just rampant running around the halls of Potomac Electric and BGE that something is going on between the two of them."

Officials at both utilities would neither confirm nor deny that merger talks are taking place. Several directors at both companies declined to comment.

"In today's environment of increasing competition and regulatory changes, it is only prudent for utilities to explore various alternative ways of doing business," BGE said in a prepared statement.

Pepco's stock price has risen by 15 percent since early January, closing yesterday at $21.13 per share. BGE went from $22 in January to $26.50 earlier this week, before settling back to $24.50 yesterday.

There are compelling reasons why utilities might want to examine their options and why a BGE/Pepco match might make sense.

Pepco, whose profits have been uneven in recent years, could use the financial assistance that stronger BGE could provide. BGE would get extra capacity and, because of Pepco's line connections, a better chance at selling electricity to the rapidly growing South, analysts said.

For both companies, a friendly merger might yield an entity big enough to be protected from hostile takeover. And most important, a merger could yield cuts in administrative costs that would allow more-competitive rates from the combined company an increasingly competitive field. That means job reductions.

A BGE/Pepco marriage would create a company with $4.6 billion in revenue, slightly larger than the $4.2 billion proposed combination of Northern States and Wisconsin Energy. Richard A. Abdoo, Wisconsin Energy Corp. chairman and CEO, estimated last month that the combination would save $2 billion over 10 years.

"There is no big savings from operating the systems jointly," said Ronald S. Tanner, utility analyst for Legg Mason Inc., a Baltimore investment house. "The big savings come from reducing duplicate employees. And as you become a bigger customer you can negotiate better contracts for supplies of material, equipment."

All the focus on mergers and competition was prompted by the federal Energy Policy Act of 1992, which forced utilities to carry other power companies' electricity on their lines for a fee.

In theory, the act freed electricity customers from captive reliance on their local power supplier, allowing clients to shop for the best deal. In practice, state regulators are moving more slowly to open up the grid.

California is among the most progressive. Maryland's Public Service Commission, the agency that regulates utilities, is evaluating industry deregulation but hasn't made any decision yet.

So far nationally, utility competition is mainly for industrial customers, who buy more power, use it more consistently and can threaten to build their own generators if producers don't lower their rates, analysts said.

But analysts, and BGE executives themselves, expect that eventually BGE will have to compete with many rivals to sell electricity to its traditional Maryland customers. When that happens, the companies with the lowest costs will be the companies that survive, analysts said.

BGE, with 8,100 full-time workers, is Maryland's ninth-largest employer.

Not everybody thinks utility mergers are automatically a good idea, or that lower rates will necessarily result. "I don't think it's a given that a merger would reduce rates," said Michael J. Travieso, Maryland People's Counsel, who represents residential customers before the Public Service Commission. "I think any merger would have to be examined closely."

An outright merger or buyout involving BGE and Pepco isn't the only possible business combination of the two companies.

Some people familiar with BGE and Pepco think it would make sense to create a freestanding corporation out of the transmission assets of BGE, Pepco and Delmarva Power & Light Co., the Wilmington, Del.-based company that furnishes electricity to Delaware and the Eastern Shore.

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