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Wednesday, February 5, 1997 - Page updated at 12:00 AM

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Puget Sound Energy Ready To Plug In As State Oks Merger

Seattle Times Business Columnist

After 15 months of regulatory review and corporate approvals, Puget Sound Energy, the new company to be created by Puget Sound Power & Light's acquisition of Washington Energy, is nearer reality.

The Washington Utilities and Transportation Commission today approved an agreement that paves the way for the creation of the new company. The agreement calls for a drop in residential electric rates this year and a slight increase in the next four years. Gas rates will remain where they are now.

The new company will have combined sales of $1.6 billion and more than 3,000 employees. It will be one of the largest utility companies in the Pacific Northwest, with 885,000 electric and 500,000 gas customers. It will also be on the leading edge of changes sweeping the utilities industry.

Downsizing not over yet

The combination also will mean continued downsizing. Company officials estimate 300 jobs will be lost when the two companies are put together. Current employees will have to reapply for their jobs since a new company is being formed.

Consumers will benefit. William Vititoe, chairman, chief executive officer and president of Washington Energy, said the merger will result in $370 million in savings over the next 10 years through efficiencies gained from the combination.

"Rates are going to be lower than they would have been under any other scenario," Vititoe said.

Few problems with merger plan

Under the UTC agreement, electric rates will drop 3.24 percent this year, then could rise 1.5 percent a year for the next four years. Consumers will continue to benefit from access to low-cost power from the federal Bonneville Power Administration.

Also under the agreement, a way to measure the quality of service will be devised, with penalties for poor service; a conservation plan must be prepared; and the company must regularly report to the commission to protect against unfair competition with other utilities.

Customers will be paid $50 if the company misses a service-call appointment.

The boards of both companies will meet Friday for final action. Stock in the new Puget Sound Energy could begin trading as early as next Tuesday.

After the merger, the new company will form a 15-member board, with 10 directors being nominated by Puget Power and five by Washington Energy. Richard Sonstelie, president and CEO of Puget Power, will become chairman and CEO. Vititoe becomes president and chief operating officer. The first board meeting is scheduled for Feb. 14.

The utilities industry has been going through dramatic change in recent years. Long a regulated monopoly, utilities have been opened to competition. As a result, utilities have been combining all over the country to create the economies of scale that will allow them to operate in a less-regulated, competitive environment.

New element of choice

Sonstelie told a recent CityClub meeting that the industry is going through great change that will affect how electricity is marketed in the future. It may not be as bad as telephone companies calling at dinner each night wanting you to switch, he said, but the element of choice will enter the equation.

"You saw some of the same things in the telephone industry and natural gas," Sonstelie said.

He said the industry is changing from one that was vertically integrated - power companies handled all aspects of power from generation plant to the meter at the home - to three different industries.

A much different business

Now there will be generators of power, transmission companies and distribution companies. Puget Sound Energy will fall into the distribution business, getting power to its customers no matter where they buy it. That will make the industry much different.

Electric companies and natural-gas companies are merging because of the need to be "energy companies," said Vititoe. The two no longer compete in the home-heating market since electricity has become too expensive in most new construction.

Large businesses will be among the first to take the choice option, Vititoe said, because they can use heavy consumption as a way of negotiating a lower price.

Vititoe said the natural-gas industry is further along the path of deregulation than the electric industry. The separation into distribution companies and transmission companies already has occurred, he said.

For example, Washington Energy sold $65 million of gas in Oregon and California last year as part of its expertise as a middleman in the gas industry. "We are going to be doing that in electricity as well," Vititoe said.

More deregulation on horizon

Deregulation of the industry could speed up even more this year under legislation now before Congress.

A quilt of federal and state laws still prevents companies from competing for individual consumer accounts. Some states have tinkered with deregulation, but Congress could sweep aside all barriers with one comprehensive law.

One bill would launch the electric industry into the chaos of competition by Jan. 1, 1998, and it would override even the most progressive states' plans to ease utilities' transition to a competitive market.

One of the biggest proponents of swift deregulation is Enron, a $14 billion-a-year energy company based in Houston.

Enron is emerging as the leader of a new generation of companies that hope to sell power across the country. It already buys and sells electricity on wholesale markets, and it plans to break into the retail business with its proposed purchase of Portland General for $3.2 billion.

Change is far from over.

PacificCorp of Portland recently said it would link up with a Nebraska company to provide Internet access, long-distance phone connections and other services.

Other utility companies, especially newly combined entities such as Puget Sound Energy, are expected to move increasingly into the business of meeting consumers' household needs, be it for heat, power or communications.

Copyright (c) 1997 Seattle Times Company, All Rights Reserved.

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