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Allegheny Energy prepares for life after deregulation

August 25, 1997

By KERRY LYNN FRALEY

Staff Writer

At this point, it's not a question of if Maryland retail customers will be able to shop around for their energy supplier but when they'll start doing it, said Allegheny Energy head Alan J. Noia.

Looking at what has been happening around the country - including Pennsylvania's recent Customer Choice Act and the Maryland Public Service Commission's hearings on restructuring last week - Noia said he and other energy company leaders are now resigned to the fact they'll be losing their government-mandated monopolies as power suppliers.

That's the reason the industry is seeing a flurry of merger attempts, said Noia, who said his company and others are trying to position themselves for impending nationwide competition.

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By consolidating operations and increasing service volume, companies will be able to bring their cost-per-unit down, which will allow them to offer consumers better rates than smaller operations, he said.

He said he foresees the merger trend to continue until the number of investor-owned electric utilities is reduced from about 130 nationwide to around dozen or so.

"In a strictly competitive environment, size matters," said Noia, chairman, president and CEO of the Allegheny Energy, which changed its name from Allegheny Power System Inc. earlier this month.

But consumer advocates say they're worried that the merger trend will defeat the intent of industry restructuring by reducing the playing field to a few giants with too much power.

Noia said his company's planned merger with Pittsburgh-based DQE Inc., parent company of Duquesne Light, is a way to secure both companies' futures when the smoke of energy industry "restructuring" clears.

The deal will increase Allegheny Energy's total electricity generating capacity by almost a third to over 11,000 megawatts, making it competitive with larger power companies in the region, Noia said.

The company - headquartered in Hagerstown - currently serves about 1.4 million homes and businesses in Maryland, West Virginia, Pennsylvania, Virginia and Ohio.

Duquesne Light serves about 580,000 customers in and around Pittsburgh.

Noia said the company will pass on an expected $1 billion in cost savings over 10 years to customers and shareholders equally.

Once the merger is completed - hopefully by May 1, 1998 - the company will start looking for other merger/acquisition prospects to further sharpen the company's competitive edge, he said.

There's merit to the idea that companies can drive down costs by joining forces with contiguous companies to streamline operations and increase their customer base, said Maryland People's Counsel Michael J. Travieso.

But those savings won't necessarily been seen by the retail customer, said Travieso, basing his thinking on classic economic theory.

When you have an oligopoly - where there are very few suppliers competing for the business of a large number of customers - prices tend to be higher than they would be if there were a lot of companies vying for the business, he said.

"You're not getting real competition," Travieso said, pointing to similar prices among the major long distance telephone service carriers as an example.

The oil industry would be a better example, said Noia, who said U.S. oil prices are the cheapest in the world because there are only a few large companies competing against each other.

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