The companies said they expect rates across the power system to be lower with the merger than they would have been without it.
"This is not about cost-cutting and downsizing," said Alan J. Noia, president and chief executive officer of Allegheny Power. "This is about strategic positioning. This is about growth and expansion."
Noia predicted that only a small number of the job cuts would be made in the Hagerstown area.
Allegheny Power spokeswoman Cyndi Shoop said that the 500 figure for the number of jobs to be lost was a preliminary figure.
Allegheny Power has cut about 1,000 jobs since December 1995 as part of a systemwide consolidation.
Noia said the merger will position the new company "as a major regional player in the increasingly competitive electric power market."
Allegheny Energy's headquarters will remain at Allegheny Power headquarters on Downsville Pike near Hagerstown. Noia said there are no plans to add staff at the headquarters.
The companies said they expect the merger to result in $1 billion in savings over 10 years.
They said the savings would result from elimination of duplicate activities, improved operating efficiency and lower costs.
The merger must be approved by company shareholders and state and federal regulators.
The companies said they expect those approvals to be forthcoming in 12 to 18 months.
DQE has 580,000 customers in an 800-square-mile service area, including Pittsburgh, and 1996 revenues of $1.2 billion. Allegheny Power has 1.4 million customers in 29,100 square miles of service area and 1996 revenues of $2.3 billion.
David D. Marshall, president and chief executive officer of DQE, said the merger combines Allegheny Power's winter-peaking rural operation with DQE's summer-peaking urban operation.
"Both companies believe in active community involvement and plan to build on that tradition," he said.
Noia said other mergers would be considered in the future but the company must first digest this one.
Standard and Poor's energy stock analyst Michael Barr said the merger follows an industry trend begun in recent years as companies prepare for increased competition through deregulation.
The chief roadblocks to such mergers have come from regulatory agencies, which have stalled some mergers for two years or more.
The merger will make it more difficult for other power companies to buy Allegheny Power, Barr said. Allegheny Power's status as a low-cost electricity producer makes it attractive to other companies, he said.
Noia said that Allegheny Power is pushing for federal legislation that would ensure that customers could choose their energy suppliers and would replace the existing patchwork of state-by-state utility deregulation moves.
DQE shareholders will receive 1.12 shares of Allegheny Power common stock for each share of DQE common stock in a tax-free transaction. Allegheny Power will issue 86.5 million shares of stock valued at about $2.6 billion to DQE shareholders.