Although the $2 billion merger plans of Utah Power & Light Co. with PacifiCorp received a setback this week, the project is not dead; it can still be approved by the FERC - the Federal Energy Regulatory Commission. Yet there is no denying that the recommendation by an administrative law judge to reject the merger has hurt the proposal.

The administrative law judge, George P. Lewnes, in a 247-page decision, considered the proposed merger to be lacking in substantial proof of any benefits to the companies or the public. That assessment is hard to accept, since the two electric power companies would hardly be seeking a merger that had no benefits for them.More surprising than the verdict itself was the blatant one-sidedness of Lewnes' arguments. Lewnes found not a single item in favor of the merger and produced 91 reasons against it.

Lewnes' decision was based on material submitted at a hearing last March, including lengthy evidence from both UP&L and PacifiCorp, yet his recommendations read as if the two power companies hadn't showed up for the hearings.

The decision serves as a recommendation to the full FERC, which can either accept Lownes' verdict, or vote against it. Action to over-ride an administrative law judge's recommendation is not unheard of.

But the negative recommendation complicates matters. One of the problems is simply time.

Under the proposed merger agreement, UP&L and PacifiCorp had set an Aug. 12 deadline for completing their deal; beyond that, either side can opt out. General accounting rules call for the merger to be wrapped up in 12 months after the original agreement was signed.

Officials at UP&L said the companies have two weeks to file a brief responding to the verdict. Included in the brief will be earlier evidence they said appeared to have been discounted or ignored by Lewnes.

One other difficulty has arisen. The normal five-member FERC is now down to three members because of resignations. This makes up a minimal quorum and it creates some dangers. For example, two opponents in a five-member commission could not defeat the proposed merger. But with two members missing, opponents could kill the project with only two negative votes.

Despite the verdict by the administrative law judge, the proposed merger still would offer a great deal to the two utilities and their customers. Among the projected benefits are savings that would hit $158 million a year by 1992 from lower construction costs, increased sales, and power sharing arrangements.

Labor costs also would be lower, though neither company intends to lay off workers. Instead, reductions would come through attrition. Both companies say the merger could lower UP&L rates as much as 10 percent.

Though the negative recommendation from the administrative law judge makes it harder to achieve, the merger still looks like an arrangement where everybody - the ratepayers, the stockholders, the employees - could all come out as winners.