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Merger of BGE, Pepco 'logical' But 2 companies are marked by many contrasts


Despite many "common values and strategies," tremendous differences exist between Baltimore Gas and Electric Co. and its proposed partner, the Potomac Electric Power Co.

Those differences -- although in no way wide enough to kill the two utilities' merger deal announced Monday -- nonetheless involve fundamental operational structures and methods of supplying power.

Assimilating the cultures and operations into a single $15 billion entity will require careful planning, company officials, analysts and industry experts say.

"In any merger, there is resistance to change," said Alex Hart, a Ferris, Baker Watts Inc. utility analyst. "That's the single biggest obstacle to overcome. Management's ability to get people on the same page is the key."

Arthur J. Slusark, a BGE spokesman, said the two sides will be forming a transition team shortly to work out the differences.

Indeed, bringing the two together means melding two companies with different customer profiles, generating sources and labor traditions. Among the more striking differences:

* Pepco, which serves Washington, D.C., and its Maryland suburbs, has no natural gas operation; its area is served by Washington Gas Light Co.

* Pepco power plants are all hydroelectric or fossil fuel. BGE, on the other hand, draws 40 percent of its electricity from its $800 million nuclear plant at Calvert Cliffs.

* Supplying the nation's capital and its suburbs, Pepco sells nearly 20 percent of its electricity to the federal government and has virtually no heavy industry. BGE's top customers, by contrast, are industrial complexes such as the Bethlehem Steel Co.

* The 180-year-old BGE has never been unionized; Pepco has been organized for years. "Ultimately employees will decide whether or not they want to be represented." said BGE Chairman and Chief Executive Christian H. Poindexter at the merger press conference.

"Labor is a major component of every merger," said Scott Hempling, a Silver Spring utility attorney involved in industry merger activity. "When one side is union and the other not, it just makes it all that harder."

Still, analysts point out the differences also provide both sides with opportunity, especially in light of the myriad changes and deregulation expected to occur in the utility industry. As a single entity, the two companies expect to save $1.3 billion over a 10-year period.

For BGE, the Pepco merger presents the opportunity to aggressively expand its growing natural gas business into Pepco's 640-square-mile territory. BGE also expects to push its retail service and appliance business into the new market, and it will benefit by having less reliance on heavy industrial customers.

The combined BGE-Pepco company will have 1.8 million electricity and 530,000 natural gas customers, serving a population of 4.5 million.

Pepco benefits from the merger mainly through the ability to enter the natural gas business and by gaining the financial security that a partner with a $3.5 billion market capitalization provides, as Pepco Chairman and Chief Executive Edward F. Mitchell pointed out Monday.

"We view this as a real logical fit, not the least of which is because of their contiguous territories," said Frank J. Setian, a partner in Barr Devlin Associates, the New York investment firm that advised Pepco in the transaction. "And for Pepco, it's an opportunity to combine with a company that's growing faster than the average."

BGE and Pepco should have little difficulty integrating their 18 power generation plants, analysts said. To a certain extent, they already have.

The two currently are part of a consortium that owns the $237 million Conemaugh power facility in Pennsylvania.

BGE and Pepco may also seek immediate ways to synchronize their respective coal operations and obtain discounts on coal purchases, Mr. Setian added.

BGE and Pepco also are part of the Pennsylvania-New Jersey-Maryland Interconnection, an eight-member power pool supplying energy to the Mid-Atlantic.

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