DALLAS -- Denver officials and BAE Automated Systems representatives began mediation this week to resolve millions of dollars' worth of claims over the faulty baggage operation and the opening delays at the $3.7 billion Denver International Airport.

City officials described the four-hour mediation session held Wednesday as constructive, saying that both sides agreed to start reviewing outstanding billings. Overall, large sums of money are at stake over the faulty baggage system, which loses and chews up luggage and has been blamed for the airports several opening delays during the past year.

Last week, BAE, the Texas company hired to install the automated baggage system, claimed the city owed it about $40 million in damages for contract changes, outstanding invoices, and other problems.

In response, the city indicated that it could make a claim later of $80 million to $90 million to correct the troubled baggage system, construct a backup system, and to pay for other damages. More talks between Denver and BAE will be scheduled soon and will continue to be led by William Neighbors, a former Colorado Supreme Court Justice, and Richard W. Dana, a former judge for the 20th Judicial District Court of Colorado.

Neither side is predicting when the mediation will finish, although some sources expect that the matter will take many weeks to resolve. The mediation sessions are the latest attempt to resolve a longstanding dispute between the city and BAE and open the huge, new airport outside of Denver by Feb. 28.

On Sept. 7, the city and BAE agreed to mediate the dispute and reached an interim agreement to complete negotiations with each other and United Airlines for construction of a modified baggage system by Sept. 30. In the meantime, however, the controversy over the claims and counterclaims has heated up.

When submitting the $40 million claim to the city late last week, BAE stated: "In short, we have been blamed for major delays that occurred through no fault on BAE's part. The public has heard only one side of the story. It was expedient to make BAE the scapegoat, but according to our experts, BAE's contract completion date has not yet been reached."

The company said it agreed to an expedited schedule, not the four years initially requested, only after receiving assurances that the city would adhere to BAE deadlines. However,"most deadlines specified in BAE's contract with the city were missed, some by nine months; some by as much as one year," BAE officials said.

BAE maintains that Denver wanted significant design changes and didn't provide a good supply of electricity until April 4, 1994, well after several airport opening delays. The company also contends that the city did not provide adequate access to the work site. As a result, it is claiming $40 million more than specified in its $193 million contract. So far, BAE has been paid about $173 million.

In addition, company officials said last week that they feel strongly about wanting to settle all claims by Sept. 30, when BAE is scheduled to reach an agreement with United Airlines on modifying the automated baggage system. However, BAE appears to have softened its position this week following a rebuttal from Denver Mayor Wellington Webb's office.

"We are saying that progress must be made in the direction of settling the claims," BAE spokeswoman Michelle Wells said Wednesday. "But everything doesn't have to be signed on the dotted line."

In a news release issued on Monday, Webb said: "Denver will not be held hostage by BAE's unreasonable demands ... and threat not to move forward with United to fix the automated system in time for Denver International Airport's opening."

In addition, Denver officials said the city has reserved its claims against BAE, which could total an estimated $80 million to $90 million. Officials said the claims include the cost of the alternative baggage system, the cost to fix or modify the inoperable BAE automated system for Concourse B, and other damages resulting from the deals.

"Denver will not pay BAE additional dollars for a baggage system that doesn't work. There is no way to completely estimate the. value of the city's claims until the system is operational," the city Said in a prepared statement.

Denver officials said the city could file a counterclaim against BAE later. "The lawyers have not ruled out that possibility," said Briggs Gamblin, spokesman for Webb. Meanwhile, "the city will review the claim and discuss it in mediation, with a goal toward solving it," Gamblin said. But "it's quite a bit to get solved in such a short period of time "before the Sept. 30 deadline, he said.

City spokeswoman-Amy Lingg said Denver officials did not know how long the mediation would take. BAE spokeswoman Wells also would not speculate on the length of the mediation.

While the claims mediation continues, the city is working on a back-up baggage system in conjunction with a Michigan firm in an attempt w open the airport by Feb. 28 at the latest.

Considering the delays, rating agency analysts are concerned about mounting costs and are continuing to monitor the situation.

Fitch Investors Service lowered its rating on the airport's revenue bonds to BBB-minus, its lowest investment grade, from BBB last month. Moody's Investors Service and Standard & Poor' s Corp. lowered the airport's bond ratings in May and retained them last month. Moody's rates the bonds conditional Ban, its lowest investment grade, and Standard & Poor's rates the bonds BB, or junk grade.

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