By Suzanne Herel
On Aug. 25, D.C. People’s Counsel Sandra Mattavous-Frye hailed the Public Service Commission’s surprise rejection of the proposed Exelon-Pepco merger as a “David and Goliath” win.
Six weeks later, Mattavous-Frye stood with Exelon CEO Christopher Crane, urging the PSC to greenlight the $6.8 billion merger under an Oct. 6 settlement brokered by Mayor Muriel Bowser and Attorney General Karl Racine. Bowser and Racine also had previously opposed the deal.
What changed? “Affordability for consumers, reliability of service, renewable and sustainable energy options and jobs,” Mattavous-Frye told RTO Insider. “The concessions offered in the proposed settlement far exceed what was offered” in the original application, she said.
With the administration and public advocate on its side, Exelon’s chances appear to hinge on winning a ‘yes’ vote from PSC Chairman Betty Ann Kane or Commissioner Joanne Doddy Fort.
The third member of the panel, Commissioner Willie Phillips, had issued a partial dissent in August, saying that while he could not support the merger as filed, he was “disappointed in the loss of the many opportunities inherent in the proposed merger that could have achieved benefits for ratepayers, the local economy and the environment of the District of Columbia.”
The other commissioners also lamented having to rule without being offered a settlement that could have addressed critics’ concerns. “Therefore, we consider the joint application as it stands on this record, not as it might have been proposed,” the order said.
That’s leading some to conclude the merger is likely to be approved.
“I think the settlement itself rather than what’s in the settlement makes it more likely” that the commission will approve it, said Anya Schoolman, president of solar power advocate group DC SUN, one of the few intervenors in the case who did not sign on to the agreement.
The PSC will hear comments through Oct. 16 on the motion by the D.C. government and the utilities to reopen the record to consider the settlement. The applicants have requested a decision within 150 days.
While Washingtonians debate whether Bowser’s decision to settle was savvy or a sell-out, the other states that approved the acquisition on a “most favored nation” status — Delaware, Maryland and New Jersey — are watching closely to see what a sweetened deal for the district will mean for them. (See related story, ‘Most Favored Nation’ Clause Triggered.)
Meanwhile, Wall Street is weighing both the odds the deal will be consummated and whether the additional concessions Exelon made significantly hurt the acquisition’s attractiveness. Exelon stock rose almost a dollar after the settlement was announced last week, closing Friday at $30.82. Pepco also rose almost a dollar, ending the week at $26.52.
The acquisition would create the Mid-Atlantic’s largest electric and gas utility — and the country’s largest utility by customer count. Exelon has said the deal would boost its customer base to nearly 9.8 million from 7.8 million and increase its rate base to almost $26 billion from $19 billion.
In making its decision, the PSC said it weighed the proposal on seven factors of public interest, among them the effects on ratepayers and shareholders, market competition and preservation of natural resources and the environment. (See DC Halts Exelon’s Acquisition of Pepco Holdings; Pepco Stock Tumbles.)
Under the settlement, Exelon would invest $78 million in the district — more than five times Exelon’s initial pledge of $14 million — to promote sustainability, increase reliability and support low-income residents. (See sidebar, Details of Exelon-D.C. Settlement.)
Of that, $17 million would be put toward conserving natural resources and the environment and promoting energy efficiency.
Exelon also would set aside $25 million to offset rate increases through March 2019 and immediately disburse $14 million to customers.
Exelon and PHI have committed to moving 100 jobs to the district from elsewhere and hiring at least 102 union employees within two years while dedicating $5.2 million in workforce training for district residents.
D.C. Councilman Vincent Orange, speaking on the Kojo Nnamdi radio show Thursday, lauded Bowser’s office for securing the agreement.
“The mayor and her team actually entered into some intense negotiations and basically, they took us from last to first in terms of benefits that are going to be realized for the ratepayers and consumers in the District of Columbia,” said Orange, a former regional vice president for PHI.
“What they’ve offered is baubles — cheap, showy things that don’t really add up,” countered Councilwoman Mary Cheh. “The people who are getting a bad deal are residents and ratepayers.”
“We think that either the mayor got tricked into agreeing to a deal that provides very little more for D.C. than the rejected deal, or she is trying to trick us into believing that this is something substantially better,” said DC Sun’s Schoolman. “The bottom line is that this does not change the underlying conflict of interest” between Exelon as a merchant generator with a commitment to its nuclear fleet and the district’s push for renewable energy.
The other public interest group absent from the settlement is Grid 2.0, which advocates for distributed generation.
“The ‘Halloween candy’ that’s been added by the mayor to make this appear better doesn’t address the underlying issues identified by the Public Service Commission,” said Larry Martin of Grid 2.0.
That was Then, This is Now
Former opponents of the merger aren’t the only ones who seem to have executed an about-face.
Exelon and Pepco initially argued against implementing a host of conditions proposed by Bowser’s administration, calling them “extraordinary and inappropriate on a number of levels.”
In particular, they said, increasing the Customer Investment Fund would be too costly. The settlement reached last week more than doubles the CIF, from $33.75 million to $72.8 million.
Due to the most-favored-nation clauses, accepting the list of conditions initially proffered by the D.C. government would have boosted the cost of the proposed transaction to $7.35 billion to $8.75 billion, according to the PSC’s order.
In addition, Crane testified that Exelon was not willing to make the boards of PHI and PEPCO more “independent” because it “is simply not tenable given the nature of the transaction and the business in general.” He went on to say, “If these or similar conditions were attached to the merger approval, I could not recommend to my board that I close the deal.”
The settlement, however, does increase the independence of PHI and PEPCO in a variety of ways.
Pepco’s CEO will be a member of Exelon’s Executive Committee and will “have full authority to make rate case decisions,” the settlement said. “The district and Pepco will be anything but ‘second tier’ in the new organization.”
Asked what changed Crane’s mind, Exelon spokesman Paul Elsberg said, “Since the PSC explained why it didn’t approve the merger, we’ve been working hard to learn what’s most important to the district — and we’ve responded in the settlement with the District of Columbia government.
“This included as part of the overall settlement package commitments that strengthen PHI board independence.”
Some of the most vocal supporters of the deal are the D.C. business community and charitable organizations that receive funding from Pepco. (See related story, Pepco’s Influence Runs Deep.)
Harry Wingo, president and CEO of the D.C. Chamber of Commerce, has supported the merger from the start and recently participated in a media blitz, including a video posted on the merger partners’ website.
Among other advantages, he said, the merger will give Pepco the ability to improve its infrastructure.
“I think the fact that the mayor is behind this improves the likelihood of this moving forward,” he said. “I’m excited about it being approved.”
James Dinegar, president of the Greater Washington Board of Trade, said the merger would improve reliability, safety and costs.
“Pepco has real challenges on reliability. Here is an opportunity to act like a real world power capital, not a city that has its power go out” frequently, he said, calling Exelon one of the best power companies in the country.
“My concern now is that if the best company can’t buy Pepco, no one can buy Pepco,” he said. If the commission rejects the merger, he said, D.C. would be left with a “wounded power company.”
“My patience is pretty well done with the opponents. … What’s your solution for reliability?”
Critics say Pepco is already facing financial penalties if it fails to improve its reliability.
Checks and Balances
One of the main concerns surrounding the original merger filing was accountability. How could the district trust that Exelon would hold true to its promises?
Mattavous-Frye said she’s satisfied that the new agreement contains the “checks and balances” needed to ensure the companies’ promises are kept.
She said a significant concession was Exelon’s agreement to use an annual measurement, rather than a three-year average, to gauge progress in improving reliability.
As she noted, reliability would be monitored on an annual basis. Exelon has agreed to open its books to the OPC and PSC. And “ring-fencing” protections have been strengthened, separating PHI’s finances from that of Exelon’s affiliates and assets, such as its nuclear business.
Still, critics point to unaddressed issues. Yes, Exelon says it will support solar installations, but, said Schoolman, nothing in the agreement speaks to what price D.C. will be charged for that energy. She said that the district currently pays above-market prices for the solar energy produced at Exelon’s project at Dunbar High School.
“Thus, this provision may actually inhibit solar development and cost D.C. taxpayers more than if private sector developers were in charge of the project,” she said.
Another squabbling point is rates. Exelon has set aside $25.6 million to offset the effect of any rate increases through March 2019. Then, however, it will begin recouping its costs with a guaranteed 5% return.
“It’s a shell game, really,” Cheh said. “They say they’re going to give us this total amount. When you actually look at it, it’s money that we’re going to be giving back to them.”
Mattavous-Frye, however, said that absent a merger, it’s likely that rate increases over the next four years would top Exelon’s proposed $72.8 million investment in the district.
“The settlement provides roughly five years to prepare for the ‘energy future’ through public education, deployment of energy efficiency programs, incorporating local solar and renewable energy and by developing local microgrids — all while D.C. ratepayers are ‘ring fenced’ from the financial impact of outside factors affecting Exelon’s utility operations,” she said.
“After 2019, certainly there will be changes, but the regulatory process of rate case investigations will remain, and Exelon-Pepco would be required to request that ‘ring-fencing’ provisions be removed or modified.”
One of the most striking provisions of the settlement is Exelon’s intention to establish D.C. as its co-headquarters with Chicago. The offices of Exelon Utilities will be moved from Philadelphia to D.C., where CEO Denis O’Brien would preside over the largest electricity distribution unit in the country. O’Brien chairs the Greater Philadelphia Chamber of Commerce.
Also moving to D.C. from Chicago would be the primary offices of Exelon’s chief financial officer, currently Jonathan “Jack” Thayer, and chief strategy officer, William Von Hoene Jr. Pepco Energy Services also would be relocated from Arlington, Va.
Most Watched Case
Generating comments from more than 3,000 individuals and organizations, the Exelon-Pepco merger has garnered more participation than any other issue in the PSC’s history of more than a century.
At the time of the PSC’s vote to reject the merger, Mattavous-Frye credited the public. Standing against the deal were 26 of the district’s 42 Advisory Neighborhood Commissions and half of the council.
“This was about consumer empowerment,” she said. “People did not think their participation would be meaningful, and it is.”
For her part, Cheh is hoping the public will rise again.
“I hope all the Advisory Neighborhood Commissions all come forth and say this settlement is bad. The community groups that took a position have to come back and say this is bad,” she said. “They really have to make their voice heard.”
— Michael Brooks contributed to this article.