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Pepco reaches accord on plants; Company to auction generation facilities, focus on service


Potomac Electric Power Co., the utility that provides electricity to most of Montgomery and Prince George's counties, has reached an agreement to sell its generation plants.

The accord, announced yesterday, marks Pepco's transformation from a do-it-all electric giant to a more streamlined business that sells electrical service but relies on other companies to generate power.

The agreement, which involves Pepco and government and corporate parties, calls for Pepco to auction its generation facilities. The money made from the auction will be used to compensate Pepco for "stranded costs," investments the company made in power plants and fuel under the regulated energy-generation system.

That regulated system is being replaced by a competitive energy market in which customers will be able to buy power from anyone they choose. Pepco is opting out of this market to focus on electrical service and distribution, a function that remains regulated. The company is also branching into telecommunications and other new markets.

While Pepco said it wanted to sell its plants to a single company, it is entertaining the possibility of selling to multiple buyers. "We intend to sell as a package," said Pepco President and Chief Executive Officer John M. Derrick Jr. "But we're interested in seeing how bidders come in."

Pepco said yesterday that its stranded costs in Maryland amount to $600 million. If the auction raises enough to create a profit, most of that profit will be distributed to consumers. If the auction does not turn a sufficient profit, consumers will have to pay a special charge.

Pepco's Maryland customers will be able to choose their energy suppliers starting in July 2000. The settlement freezes rates until July 1, 2003, for customers who continue to buy power from Pepco. The prices would be capped at what they were July 1, 2000, and will be reduced if Pepco garners a profit from its auction.

The agreement is contingent on approval from the Public Service Commission and on the General Assembly's adoption of electric restructuring legislation.

Ron Tanner, an analyst with Legg Mason Wood Walker Inc. in Baltimore, said the agreement "sounds pretty positive" for Pepco. He said that unlike some utilities in similar situations, Pepco is not being compelled to reduce rates.

Tanner added that Pepco will use money from the auction to pay down debt and buy back stock, a move that is likely to raise Pepco's share price. "Wall Street loves it when companies buy back their stock," Tanner said.

Wall Street expressed some affection yesterday, sending Pepco shares up $1.25, to $24.375.

Pub Date: 2/04/99

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