By Suzanne Herel, Michael Brooks and Ted Caddell
WASHINGTON — A split D.C. Public Service Commission said today it would approve Exelon’s $6.8 billion acquisition of Pepco Holdings Inc. in return for additional concessions beyond those negotiated by Mayor Muriel Bowser.
If Exelon and Pepco agree to a revised settlement supported by Commissioners Joanne Doddy Fort and Willie Phillips, the merger will be approved without further commission action, making Exelon the country’s largest utility by customer count.
“The commission’s order prescribes new provisions that we and the settling parties must carefully review to determine whether they are acceptable,” Exelon and Pepco said in a statement after the commission’s actions. “Once we have had a chance to study the order and confer with the settling parties, we will have more to say about what it means and our next steps.”
“Obviously we’re hopeful because they didn’t reject it. It appears they want it to happen,” said Pepco spokesman Vincent Morris, who was in the hearing room.
Two 2-1 Votes
In the first of two votes, the commission — which unanimously opposed the merger in August — voted 2-1 to reject a proposal brokered by Bowser’s administration as not in the public interest. Phillips dissented.
But Chairwoman Betty Ann Kane found herself alone in a second 2-1 vote, which said the deal could be salvaged with changes to the settlement.
That motion, offered by Fort, consisted of four concessions regarding the use of the customer investment fund, the development of a 5-MW solar generation facility at the Blue Plains Advanced Wastewater Treatment Plant and the role of Pepco in establishing public-purpose microgrids. (See DC PSC’s Counteroffer below.)
‘Hands Off Ratepayers’ Money’
The Bowser-brokered deal had earmarked money from the CIF for a handful of D.C. groups, including the Sustainable Energy Trust Fund, the District of Columbia Consumer and Regulatory Affairs Green Building Fund and the Low Income Home Energy Assistance Program.
The PSC’s counteroffer takes those funds, totaling $32.8 million, and places them into an escrow account to pay for projects to modernize the district’s energy system and for energy efficiency and energy conservation initiatives focused on housing for low- and limited-income residents. The PSC would have authority over the funds’ disbursement.
“This is a huge slap at the mayor’s office, saying ‘Keep your hands off ratepayers’ money,’” Anya Schoolman, head of D.C. Solar United Neighborhoods, which opposed the merger, told The Washington Post.
The settling parties have 14 days to accept the conditions.
“We will have to carefully review the commission’s order to determine if it meets our goals for ratepayers, especially residents,” Bowser said in a statement.
People’s Counsel Sandra Mattavous-Frye released a statement saying, “At this point, we are carefully reviewing the order to understand the alternative terms PSC put on the table to determine our next steps.”
Exelon Approval Expected
Both supporters and opponents of the deal said they expect Exelon to accept what appear to be modest additional concessions.
Dave Bonar, Delaware’s Public Advocate, said he was surprised at the commission’s initial rejection but was heartened to hear it offer a revised settlement.
“Hopefully the company will accept this, and we can all move on,” he said. “I’m sure [Exelon’s executives] are all in a room someplace, working on a response. Considering as much time and energy and expense that has been put into this, I think [Exelon] will say yes.”
Montgomery County (Md.) Council Vice President Roger Berliner, who has been a steadfast opponent to the merger, said he was “deeply disappointed” and expects the deal will come to pass.
“Oh, [Exelon] may gnash their teeth publicly, but they will take this deal. If I was them, I’d say ‘Oh, this is going to be a bitter pill,’ but nothing proposed is going to be the poison pill,” Berliner said. “There is nothing [in the proposed alternative settlement] that would make them walk away.”
Berliner noted that “questions will be raised” in the other states that approved the merger about some of the deal-sweeteners the district was offered by Exelon. Those agreements were struck under “most-favored nation” status, meaning in the end, all must receive equivalent benefits.
Robert Howatt, executive director of the Delaware Public Service Commission, said he fully expects Exelon and Pepco to accept the D.C. PSC’s proposal.
“This is about what I expected,” he said. He applauded the commission for proposing an alternative. “Assuming the D.C. approval holds, that basically means the merger will go through, and Delaware stands to realize more benefits.”
The initial vote rejecting the merger prompted cheers in the hearing room — and vertigo for investors.
Pepco shares, which opened the day at $26.50, fell 8.4% at 10:21 a.m. after the first vote was announced. But the stock rebounded just as quickly after the commission offered a way to salvage the deal. Exelon shares fell 1% on the initial news.
Pepco stock closed the day up 0.3%, while Exelon was down 0.78%.
Kane explained her second vote by saying there was no alternative to address the fundamental conflict between Exelon’s commitment to its merchant generation fleet and D.C.’s move toward renewable energy.
She added that there was “no evidence in the record that Pepco could not continue to perform adequately and reliably” without the merger, and that the commission had found PHI to be financially healthy.
“There are additional significant flaws in the [nonunanimous settlement agreement (NSA)] which are not addressed by the proposed alternative terms. In particular, the return of Pepco to an ownership structure that includes energy generation, supply, marketing and sales will result in an entanglement of management, financial health and decision-making. This is a fatal flaw which will adversely affect Pepco and create a diversion of focus that carries it in the opposite direction from D.C. law and policy,” she said.
“I dissent from the conclusion that if they accept these commitments that the acquisition would be in the public interest.”
Phillips voted reluctantly for Ford’s motion, saying he “had no hand in fashioning the conditions.”
“I believe the NSA as presented is in the public interest and should be approved. However, I do not have the majority in my favor,” he added. “I cast my vote today to allow my colleague to circulate proposed terms for the sole purpose of giving the settling parties an avenue to consummate their agreement, instead of resulting in an outright denial.”
GSA Supports Revised Deal
D.C.’s largest consumer of electricity, the federal government, had opposed the merger on grounds that it didn’t provide benefits for non-residential customers. Ford agreed that was a flaw and addressed it in the concessions.
After the votes, the General Services Administration released a statement saying, “We urge the settling parties to accept the new conditions proposed by the commission in response to our stated concerns.”
Paula Carmody, Maryland People’s Counsel, said she was disappointed in the D.C. commission’s offer of a revised settlement. She was heartened, however, by Kane’s dissent.
“The dissent is right on, consistent with our dissent,” she said, noting that her office, along with some environmental and consumer advocacy groups, has an appeal pending with the Maryland Special Court of Appeals after the Maryland Circuit Court upheld the PSC decision last year.
D.C. Councilwoman Mary Cheh said the revisions offered by Fort are “immaterial. They’re a drop in the ocean in terms of what this deal means going forward in the long term in the District of Columbia. We have suffered a terrible loss today, and I’m especially disappointed in Commissioner Fort, who I thought was probably somebody who could look past the big money, the politics and the conflict of interest.”
Schoolman’s group also was disappointed. “Today’s decision is really a Band-Aid on a problem that can’t be fixed,” said D.C. Solar United Neighborhoods spokesman Ben Delman. “Fundamentally, this merger isn’t in the public’s interest and D.C.’s interest.”
Mike Tidwell, director of the Chesapeake Action Climate Network, decried the commission’s actions as a result of “crony politics.”
“While Mayor Bowser and Exelon lobbyists celebrate, D.C. residents will brace for big rate hikes and new roadblocks to clean energy,” he said in a statement. “Exelon wants this deal in order to milk D.C. ratepayers for maximum profits and prop up its own troubled bottom line. After a barrage of lobbying, ads and backroom dealing, Mayor Bowser, and now the PSC, have agreed to turn D.C. ratepayers over to Exelon without securing any substantive public benefit in return.”
Public Citizen called the proposed deal “irredeemable.”
“There are no superficial conditions or short-term fixes that will benefit D.C. consumers,” said spokeswoman Allison Fisher. “It is disappointing that the immense political pressure and the full flex of Exelon’s money and influence trumped district regulators’ mandate to protect D.C. utility customers.”
Friday’s votes capped a two-year effort by the Chicago company to capture PHI’s $7 billion rate base. The addition of Pepco’s 3.3 million customers would boost Exelon to nearly 9.8 million ratepayers. In the process, Exelon spent an estimated $259 million and agreed to $78 million in public benefits.
Exelon offered to pay $27.25/share for Pepco, a 27% premium over the price before word of a possible merger leaked. The deal continues a shift by utilities to increase their regulated assets, with their dependable earnings, and decrease their reliance on volatile merchant generation.
D.C. was the only jurisdiction standing in the way of the merger, which had been approved by FERC and regulators in Delaware, Maryland, New Jersey and Virginia.
Deal Got Second Life
The PSC agreed to reopen the case in October and accepted the companies’ request for an expedited hearing schedule. (See DC PSC Rulings Give Exelon-PHI Merger a Shot in the Arm.)
Exelon CEO Christopher Crane had reiterated during an earnings call with analysts Feb. 3 that Exelon would walk away from the merger after March 4.
Under the deal rejected today, Exelon would have set aside $25 million to offset rate increases through March 2019 and immediately disburse $14 million to customers. (See Details of Exelon-DC Settlement.)
Exelon and PHI would have moved 100 jobs to the district and hired at least 102 union employees, while earmarking $5.2 million for workforce training.
Exelon also would have established the district as its co-headquarters with Chicago, relocating the primary offices of its chief financial officer and chief strategy officer. Also moving to D.C. from Philadelphia would have been the offices of Exelon Utilities.
Tens of thousands of individuals and organizations filed comments on the merger, more than any other issue in the PSC’s history of more than a century.
No Stranger to Mergers
Exelon was formed from the 2000 pairing of Philadelphia’s PECO Energy and Chicago’s Commonwealth Edison. It grew further with the 2012 acquisition of Baltimore’s Constellation Energy. The company has had its share of failed unions, dropping a merger effort with Public Service Enterprise Group in 2006 and having its overtures spurned by PPL in 1995 and NRG Energy in 2009.
As expected, its acquisition of Pepco sailed through reviews by FERC and the Justice Department — the acquisition brought Exelon no additional generation and thus raised no supply-side market power concerns — but had a tougher time in the states and D.C.
New Jersey regulators approved a settlement last February over the opposition of the state consumer advocate. The deal cleared the Maryland Public Service Commission by only a 3-2 vote last May.
In a 2-1 vote, the D.C. Public Service Commission on Friday rejected the Exelon-Pepco merger as proposed, citing four reasons why Chairwoman Betty Ann Kane and Commissioner Joanne Doddy Fort deemed it not in the public interest.
But Fort then departed from Kane, saying the settlement negotiated by Mayor Muriel Bowser’s administration was “not fatally flawed” and could be fixed with additional concessions.
In a second 2-1 vote, Commissioner Willie Phillips joined Fort in offering a revised settlement including four changes that they said would make the deal acceptable without further commission action.
The order requires all of the settling parties to agree to accept the revised settlement within 14 days. In addition to Exelon and Pepco, that includes the Office of People’s Counsel; the District of Columbia Government; the D.C. Water and Sewer Authority; the Consumer Law Center; the National Housing Trust; the National Housing Trust-Enterprise Preservation Corp. and the Apartment and Office Building Association of Metropolitan Washington.
The proposed changes address the allocation of the $72.8 million customer investment fund (CIF) and Exelon and Pepco’s role in development of a solar generation facility and four microgrids. Below is a summary of the issues and the proposed changes.
ISSUE 1: A $25.6 million allocation from the proposed CIF for base rate credit relief excludes non-residential ratepayers. The commission also worried that the allocation could undermine its ability to address the current negative rate of return for residential ratepayers and the resulting subsidies placed on non-residential consumers.
Proposed Change: Strike “residential” from the name of the credit. Defer a decision on allocating the relief until the next Pepco rate case. At that time, the parties in the base rate case would have a chance to recommend to the PSC how the credit should be distributed and over what period of time.
ISSUE 2: Exelon’s designation as developer of a solar generation facility at the D.C. Water and Sewer Authority’s Blue Plains Advanced Wastewater Treatment Plant and Pepco as developer of four microgrids undermines competition and grid neutrality.
Proposed Changes: Remove provision naming Exelon the developer of a proposed 5-MW facility. Require Pepco to facilitate the project’s interconnection for a vendor to be chosen by D.C. Water. Strike Pepco’s role as developer of public-purpose microgrids; require it to facilitate pilot projects to modernize D.C.’s energy system.
ISSUES 3 and 4: The proposed uses for the CIF for sustainability projects and low-income assistance do not improve Pepco’s distribution system, nor advance the modernization of the district’s energy systems or distribution grid. The proposed allocation method for the CIF deprives the commission of the ability to ensure all money is being used to enhance the distribution system and benefit district ratepayers.
Proposed Change: Create an escrow fund with two subaccounts to hold $32.8 million of the CIF: $21.55 million for pilot projects to modernize the energy system and $11.25 million for energy efficiency and energy conservation programs focusing on housing for low- and limited-income residents. The commission would decide how the funds would be released.