UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 2, 1997
POTOMAC ELECTRIC POWER COMPANY
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 1-1072 53-0127880
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
1900 Pennsylvania Avenue, N. W., Washington, D. C. 20068
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-3526
(Former Name or Former Address, if Changed Since Last Report)
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PEPCO
Form 8-K
Item 5. Other Events.
Exhibits 99.1 and 99.2 attached hereto are hereby incorporated by reference.
Item 7. Financial Statements and Exhibits.
(c) Exhibits
Exhibit No. Description of Exhibit Reference
99.1 News Release of Potomac
Electric Power Company and
Baltimore Gas and Electric
Company dated May 2, 1997........Filed herewith.
99.2 Letter of Potomac Electric
Power Company and Baltimore
Gas and Electric Company
dated May 2, 1997................Filed herewith.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Potomac Electric Power Company
(Registrant)
By /s/ D. R. WRAASE
Dennis R. Wraase
Senior Vice President and
Chief Financial Officer
May 5, 1997
DATE
-2-
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[BGE logo here] [PEPCO logo here]
N E W S R E L E A S E
========================================================================
FOR IMMEDIATE RELEASE Contact: Art Slusark (BGE) 410-234-7436
May 2, 1997 Nancy Moses (PEPCO) 202-872-2680
BGE/PEPCO File Application for Rehearing of
Maryland Public Service Commission's Merger Order
Baltimore Gas and Electric Company (BGE) and Potomac Electric Power
Company (PEPCO) today officially filed an Application for Rehearing of
Maryland Public Service Commission Order 73405. Issued on April 16, the
order approved the merger of the two companies to form Constellation Energy
Corporation, but imposed conditions that eliminated any reasonable
opportunity for shareholders of the new company to share in the merger
benefits.
In their application the companies detailed areas of the order that
need to be revised for the merger to proceed. BGE and PEPCO proposed a
modified plan to address these concerns. The highlights of this modified
plan include:
- - a $26 million rate reduction for Constellation Energy's Maryland
customers upon completion of the merger, followed by a four-year
base-rate freeze;
- - a comprehensive surcharge that permits full cost recovery of power
purchase contracts the Commission has previously approved;
- - a synergy sharing mechanism that splits merger benefits on a 50/50
basis between customers and investors, allowing further customer rate
reductions if the new company's operations result in additional
savings; and
- - recovery of merger costs over the four-year, base-rate freeze period
for synergy sharing purposes.
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PAGE 2-2-2
"We believe that the fundamental objectives of our merger can be
achieved with this revised regulatory framework, and that the proposed
merger still offers tremendous benefits to customers and shareholders of
BGE and PEPCO," said BGE's Christian H. Poindexter and PEPCO's Edward F.
Mitchell, Chairmen of the Boards and CEOs of the two companies. "We are
hopeful that the Maryland Public Service Commission will agree this
modified regulatory plan provides an equitable sharing of the savings
arising from the creation of Constellation Energy. These modifications to
the PSC's order, combined with a similar regulatory approval from the
District of Columbia, will allow us to proceed with the merger on solid
financial ground."
-- ### --
(To view a copy of BGE and PEPCO's complete Application for Rehearing,
visit the News & Information page on the BGE website at www.bge.com)
[BGE logo here] [PEPCO logo here]
May 2, 1997
To the Financial Community:
Baltimore Gas and Electric Company and Potomac Electric Power Company
remain committed to their proposed merger to form Constellation Energy
Corporation. We are encouraged that we recently received unanimous
unconditional approval for the merger from the Federal Energy Regulatory
Commission. However, much work remains to be done to obtain an acceptable
final approval from the Maryland Public Service Commission for our proposed
merger to proceed. We are also awaiting an order from the District of
Columbia Public Service Commission.
Among our goals in creating Constellation Energy Corporation was to provide
substantial benefits to customers and shareholders of BGE and Pepco. We
have stated from the outset that we could not proceed with our merger
unless the regulatory approvals provided for an equitable sharing of the
savings that will result from the creation of Constellation Energy
Corporation. Our stance on this critical issue is unwavering - we cannot
go forward with our merger unless shareholders of BGE and Pepco have a
reasonable opportunity to share the benefits of this merger with customers
in the District of Columbia and Maryland.
The Maryland Public Service Commission recently agreed with us that the
creation of Constellation Energy Corporation through the merger of BGE and
Pepco was in the public interest. However, the Commission's Order
contained several key provisions which must be revised in order for the
merger to proceed.
The fundamental problem with the Maryland Commission's Order is that it
does not provide an equitable sharing of the benefits of the merger between
shareholders and customers. This inequity results from the combined
impacts of:
- a large up-front rate reduction,
- denial of recovery of the costs associated with two
previously-approved purchased power contracts, and
- imposition of a series of earnings tests that imperil
recovery of other operating costs, including the costs
for a third purchased power contract which begins in 1998.
In order to simplify and expedite the process, BGE and Pepco have
streamlined their Application for Reconsideration of Maryland Public
Service Commission Order 73405 to challenge only those components of the
Order which directly imperil our proposed merger. While we disagree with
various other provisions contained in the Order, we will not challenge
these less critical issues at the present time so as to minimize the
required revisions to the Maryland Commission's Order.
There are three key changes to Maryland Public Service Commission Order
73405 that BGE and Pepco need for the merger to proceed:
1. The Order must provide for an equitable sharing of the
benefits of the merger between customers and shareholders.
We are requesting that the Maryland Commission adopt the
companies' proposal for 50/50 sharing of the merger
benefits. The Commission Order currently provides
customers with an up-front rate reduction based on 75% of
the merger benefits going to customers. While BGE and
Pepco's original proposal provided for a customer refund at
the end of the year in order to share the merger benefits, we
have modified our proposal in order to provide an up-front
customer rate reduction of $26 million based on a 50/50 split
of the net merger savings. In addition, we remain committed to
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sharing additional money with our electric customers at
the end of each year by sharing equally any dollars above the
level necessary to achieve an 11.9% return on equity. While
this threshold for synergy sharing is 50 basis points higher
than the Maryland Commission's recommended return on equity
of 11.4%, it represents a significant reduction from the 13%
threshold used by the companies in their original application.
2. BGE and Pepco must be granted the opportunity to recover
the costs associated with three existing purchased capacity
contracts. These previously-approved contracts represent
significant future outlays for BGE and Pepco, and failure to
provide for recovery of these costs as a condition of the
merger is extremely detrimental to the companies'
shareholders.
3. All supplemental earnings tests proposed by the Maryland
Commission must be replaced by the comprehensive Synergy
Sharing Mechanism proposed by the companies. As noted
above, the companies have substantially reduced the return
on equity that serves as a threshold for sharing under this
mechanism from 13% to 11.9%. The companies believe that this
concession dramatically improves the potential customer
benefits of our proposal and eliminates the need for the
supplemental earnings tests proposed by the Maryland
Commission.
In their Application for Reconsideration, BGE and Pepco have extended the
rate freeze period from three years to four years. This extended rate
freeze period would begin with the effective date of the merger. This will
further improve the customer benefits stemming from the creation of
Constellation Energy Corporation while providing a reasonable sharing of
these benefits with Constellation shareholders. A comparative summary of
the Maryland Commission's Order and the original and revised requests of
BGE and Pepco follows on the next page.
We are hopeful that the Maryland Public Service Commission will agree with
us that our modified regulatory plan provides an equitable sharing of the
cost savings arising from the creation of Constellation Energy Corporation.
These modifications to the Commission's Order, combined with a similar
regulatory approval from the District of Columbia, will allow us to proceed
with the merger on solid financial ground. We believe that the fundamental
objectives of our merger can be achieved with this revised regulatory
framework, and that the proposed merger still offers tremendous benefits to
customers and shareholders of BGE and Pepco. However, we are firmly
committed to protecting the interests of our shareholders, and we will not
be able to proceed with the merger unless the regulatory approvals conform
to our fundamental requirement that shareholders have a reasonable
opportunity to share in the expected benefits of the merger.
You may download a copy of the BGE/Pepco Application for Reconsideration to
the Maryland Public Service Commission by visiting BGE's Website at
http://www.bge.com.
Please direct any questions to the following BGE and Pepco personnel:
BGE Pepco
David A. Brune Dennis R. Wraase
Vice President, Finance & Accounting, Senior Vice President and
Chief Financial Officer and Secretary Chief Financial Officer
(410) 234-5511 (202) 872-2695
Kevin J. Miller Peyton G. Middleton
Director - Financial Planning Manager - Investor Relations
(410) 234-5434 (202) 872-2797
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<TABLE>
Comparative Summary of Key Provisions
(All Dollars in Millions)
BGE/Pepco Filing
<CAPTION>
<S> <C> <C> <C>
Application for
MPSC Order Original Reconsideration
Up-Front Rate Reduction $56 $0 $26
(75% of savings) (SSM giveback at year-end) (50/50 Sharing)
Base Rate Freeze 3 years January 1, 2000 4 years
(From merger date) (Approximately 2.5 years) (From merger date)
Purchased Capacity Surcharge None for Panda and Ohio Surcharge for all MPSC Surcharge for all MPSC
(Approx. $100 million combined annual Edison contracts approved contracts approved contracts
increase by 1999 in Maryland and the
District of Columbia in purchased
capacity costs) Surcharge subject to No earnings tests No earnings tests
earnings test
Return on Equity Threshold for 11.4% 13% 11.9%
Synergy Sharing Mechanism (SSM)
Cost to Achieve Reflected in 5 years for employee 3 years 4 years
Calculation for SSM Purposes termination costs, 10 years (Rate Freeze Period) (Rate Freeze Period)
for all other costs
</TABLE>
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