The chances of Utah Power & Light Co. and PacifiCorp getting federal regulatory approval of their $2 billion merger have not completely died, but this week's initial rejection of the proposed merger has dimmed hopes of the deal coming through.
Merger plans of the two utilities received a major setback Monday when an administrative law judge recommended that the Federal Energy Regulatory Commission deny the merger.Reaction to the negative recommendation was mixed, with some observers puzzled by the strong rejection issued Monday by administrative law judge George P. Lewnes.
"We are at a loss why the (udge's) opinion came out the way it did. He obviously bought some of the arguments we rejected," said Ralph Creer, director of Utah's Division of Public Utilities, which supported the merger in hearings before the Utah Public Service Commission.
On the other hand, the state's Committee of Consumer Services was pleased with the initial FERC decision, saying it concurs with the committee's opposing stance on the merger.
"He addresses the same points we have locally and had similar findings on economic development, cost-allocation problems and that the professed benefits don't exist," said committee executive director Joe Ingles.
UP&L and Oregon-based Paci-fiCorp announced their intent to merge in August 1987, promising the marriage would result in $500 million in savings and power rates 5-10 percent lower within five years. The merger, a stock swap valued between $1.8 billion and $2.2 billion, would create a utility serving more than one million customers in seven states.
But in his 247-page decision, Lewnes criticized the proposal to merge as lacking in substantial proof of any benefits to the companies or the public, saying it was based on "arid sophistries and futile hypothesis."
He said that regulatory review of promises of future rate reductions would require "materials as enigmatic as the dreams Joseph was called upon to interpret for Pharoah."
Lewnes' list of 91 findings as to why the merger shouldn't be approved read as though UP&L and PacifiCorp never showed up at the FERC hearings last March. He determined the applicants had failed on nearly every aspect to prove the merger was in the public interest.
Wall Street appeared uncertain about the merger's prospects after the announcement as UP&L stock opened Tuesday at $28.50 per share, down $2 from Monday's opening. PacifiCorp stock was up 25 cents at $34.75 a share.
But one analyst was upbeat about the judge's initial decision, saying it was merely a message to UP&L and PacifiCorp to beef up their case so that after the commission overturns Lewnes' recommendation opponents couldn't appeal it.
"This is a buying opportunity. The stock has taken a hit, but it will rebound back up," said Ed Tirello, senior vice president and utilities analyst for Shearson Lehman Hutton, which is highly supportive of mergers in the electric utility industry.
He said the FERC supports this merger but wants to avoid spending taxpayers' money defending its approval. "They know that people will try to sue and stop this, so they issued 91 possible ways this could go to court and asked the applicants to address them."
In an unusual twist, the Utah Associated Municipal Power Systems was disappointed in the decision, while public-power groups nationwide opposing the merger as anti-competitive praised the ruling.
Alene Bentley, a UAMPS spokeswoman, said the statewide organization of municipally owned power systems had gained transmission concessions from UP&L as a result of the proposed merger and doesn't want to see those voided.
"We feel like the bridesmaid hoping to catch the bouquet and now the wedding may be called off," she said. "To say we're disappointed is an understatement."
While UP&L appreciates the condolences and positive support, it is not discounting the complications Monday's ruling could have on the approval process.
"Many think the FERC will overturn it, but we have our work cut out to put this together quickly," UP&L spokesman John Ward said of the utility's brief it must file responding to Lewnes' decision.
He said Lewnes' decision contained several factual errors and within two weeks the companies will resubmit evidence that appeared discounted or ignored by Lewnes.
"It looks like our reply will be pretty thick."
The administrative law judge's decision serves as a recommendation to the full commission, which issues the final ruling either supporting or overruling the initial decision.
The billion-dollar merger has so far been on an expedited schedule at the FERC, but some observers say a major concern is whether a quorum of commissioners can consider the issue before August. UP&L and Paci-fiCorp have set an Aug. 12 deadline to complete the deal and after that date have the option to call it off or regroup. Accounting rules require the merger be completed 12 months after the agreement was signed.
But the five-member FERC will be down to only the required three commissioner quorum by the end of July.