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Energy East Corp. is offering to freeze electricity prices for New York State Electric & Gas Corp. customers through 2008 as part of the company's $2.4 billion deal to buy RGS Energy Group.

The merger, which would combine NYSEG and Rochester Gas & Electric Corp. to create a utility that serves half of upstate New York, would offer consumers protection from the soaring electricity prices that have caused havoc in California and driven up energy costs nationwide, executives said Tuesday.

"We think we've got a very compelling proposal that will protect our customers," said Wes von Schack, Energy East's chairman, president and chief executive officer. "We feel it's very important for the upstate economy to have stable prices."

Von Schack said NYSEG soon expects to file a proposal that would extend its current rate agreement, which expires in 2003, for another five years, effectively freezing rates through 2008.

That rate freeze would cover both the cost of delivering the power to customers, as well as the commodity cost of the electricity, to guarantee stable energy prices for consumers within its service territory.

NYSEG's coverage area in Erie County includes Clarence, Cheektowaga, Lancaster, Alden, West Seneca, Elma, Marilla, Hamburg, Orchard Park, Aurora, Wales, Boston, Colden, Holland, Concord and Sardinia, and parts of Niagara, Wyoming, Cattaraugus, Chautauqua and Orleans counties.

"This will differentiate ourselves from other utilities in New York by taking on the commodity and insulating our customers," von Schack said.

Stable prices are an enticing carrot for consumers at a time when wholesale electricity prices have soared by 200 percent since November 1999, von Schack said.

In contrast, while Niagara Mohawk has proposed a 7.8 percent cut in electricity delivery charges for residential customers and a 13.4 percent reduction for big industrial customers, their total bills are expected to rise because the rates do not cover the soaring price of the electricity itself.

"We're not talking about raising people's electric bills," said Thomas Richards, RGS Energy's chairman, president and chief executive officer. A similar rate freeze would be sought for customers of RG&E, whose current rate agreement expires next year.

Von Schack said Energy East can offer to freeze rates because both NYSEG and RG&E have fully hedged their electricity supply needs through 2003 to protect against big price swings. The companies also have the ability to generate a significant amount of their own electricity, including 1,000 megawatts of capacity owned by RGS Energy, and have made commitments to buy additional power through long-term contracts.

The long-term rate freeze would allow Energy East to take further steps to lock up its supply of electricity at predictable prices beyond 2003. "We believe, in this environment, you need to go out even further," von Schack said. "The longer we go out, the better opportunity we have to secure contracts for the benefit of our customers."

The merger is expected to produce about $50 million a year in cost savings, beginning in 2004, mostly from combining purchasing, administrative and information system functions. NYSEG's current rate agreement with the state Public Service Commission allows the company to retain all of the savings resulting from a merger during the first five years after a deal closes.

While Energy East won't share those savings with its customers, von Schack said the promise of seven years of rate stability is a big benefit for consumers.

"We think that's worth a lot," he said. "We have to manage the risk and that's not an insignificant job. You've got to look at it as customers avoiding price increases for both delivery and supply."

The merger is not expected to result in any job cuts among the combined company's 5,000-member work force in upstate New York, although the company's employment could decline over time through attrition.

NYSEG's operating headquarters will remain in Binghamton, while RG&E and NYSEG's headquarters will be in Rochester. "The RG&E and NYSEG names will not fade away," Richards said.

About 40 jobs are expected to move to Rochester, mostly from Ithaca, as a result of the merger, which is expected to be approved by state and federal regulators in about a year, he said.

The $39.50 per share price will pay RGS shareholders a 19 percent premium over the company's share price of $33.10 on Friday. Shareholders will have the option of receiving cash or stock, although 55 percent of all shares must be exchanged for cash. Energy East stock fell 79 cents to $18.35, while RGS Energy's shares gained $3.30 to $36.40.

Energy East has been on an acquisition binge over the last two years, wrapping up four deals that have pushed the company's operations into Connecticut, Maine, New Hampshire and Massachusetts as part of the firm's strategy of building a "super-regional" energy company.

As a result, Energy East's electric business has doubled in size, while its natural gas business has tripled. With the RGS Energy acquisition, Energy East will have nearly 1.8 million electric customers and 910,000 natural gas customers, with annual revenues of more than $5.2 billion.

The deal also combines a pair of utilities with service territories that share more than 200 miles of common borders, creating a single company that serves an area in Western and Central New York that runs virtually uninterrupted from Lake Ontario to the Pennsylvania border.

"We start with a lot in common," Richards said. "We nestle comfortably in the Energy East service territory."

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