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BGE, PEPCO deal hits a snag Court decision delays proposed merger; plan may be altered

A Baltimore County judge yesterday rejected Baltimore Gas and Electric Co.'s arguments that would have allowed state utility regulators to determine the outcome of an organized labor challenge to its proposed $3 billion merger with the Potomac Electric Power Co.

Baltimore County Circuit Judge James T. Smith Jr.'s decision not only further stalls the merger between BGE and Pepco, but also represents a financial setback that some analysts said could force the companies to change their plans.

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In addition, the judge decided the state's Public Service Commission may adjust a $56-million-a-year electric rate decrease down to $47.5 million a year because of a "computational error" on the part of the PSC, a mistake state regulators called "unfortunate."

But, the proposed rate reduction still doesn't come close to what the two utilities had requested. In early May, BGE and Pepco officials warned that the merger would unravel unless regulators lowered the rate cut to $26 million a year.

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Smith also elected to keep the case in the circuit court at least through July 28, rather than send it back to the PSC, as BGE and Pepco had requested. A lawyer for BGE and Pepco called future PSC involvement "absolutely essential for the merger to go forward."

It was not clear whether the judge will rule on the case itself July 28 or whether he will simply decide if the PSC has further jurisdiction. But Judge Smith hinted that the PSC's involvement may be finished.

"I'm not persuaded the motion to remand this case should be granted," he said.

The court challenge to the merger, brought by the International Brotherhood of Electrical Workers, the labor union representing Pepco employees, marks the latest in a series of obstacles BGE and Pepco have faced in their effort to combine.

But unlike past regulatory hurdles, analysts say the circuit court challenge -- and the costly delays that go with it -- could spell the death of the proposed Constellation Energy Corp. The merger would create the nation's ninth largest energy concern with $15 billion in assets.

"It doesn't sound good for the merger," said Ronald S. Tanner, a utility industry analyst at Legg Mason Wood Walker Inc. "BGE had drawn a line in the sand. This inevitably delays the merger, and we have yet to hear from the District of Columbia PSC. I think the two companies would have to be very committed to the merger if they decide to pursue it."

"The essential question now I think is whether the merger will go forward or not," said Michael J. Travieso, head of the state's Office of People's Counsel, a citizens' advocacy agency, and an opponent of the BGE/Pepco merger.

"To me, it's now pretty clear that there are a set of assumptions that the companies' financial analysts are going to have to consider before deciding whether to go forward or not," Travieso said.

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Reviewing options

A BGE spokesman declined to comment on what effect yesterday's ruling would have on the merger -- originally planned to take place April 1 -- or whether efforts to complete the corporate marriage would continue.

"We are reviewing today's decision on what is a very complex issue," said Arthur J. Slusark, the BGE spokesman.

"We had hoped that request for a rehearing of the case could be resolved by the PSC. Right now, both companies are determining their options based on today's proceedings."

The IBEW sought the judicial review in early May, two weeks after the PSC approved the merger, claiming it fails to serve the public's interest.

The union also challenged the $1.3 billion figure that BGE and Pepco contend the merger will save, calling it unrealistic.

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Pub Date: 7/09/97


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