Exelon, Pepco review options after D.C. regulators block merger

Pepco Exelon logos

Exelon and Pepco Holdings said Aug. 25 they would review their options after the Public Service Commission of the District of Columbia voted to deny their merger application as filed, adding they will respond once the process is complete.

“We are disappointed with the commission’s decision and believe it fails to recognize the benefits of the merger to the District of Columbia and its residents and businesses,” the utility holding companies said in a joint statement posted on both of their websites. “We continue to believe our proposal is in the public interest and provides direct immediate and long-term benefits to customers, enhances reliability and preserves our role as a community partner.”

Representatives for both companies did not respond to TransmissionHub’s requests for comment by press time on Aug. 25.

As TransmissionHub reported, PSC Chairman Betty Ann Kane, along with Commissioners Joanne Doddy Fort and Willie Phillips, in an Aug. 25 open meeting, voted in favor of a motion, which noted that the commission finds that the merger application, as filed, is not in the public interest and is denied.

In a separate vote on a motion to approve the actual order that denies the application as filed, Kane and Fort voted in favor of adopting the order denying the application as filed, while Phillips voted against it; the order was approved by a vote of 2-1.

As noted in an Aug. 25 PSC statement, regulators in Virginia, New Jersey, Delaware and Maryland, as well as FERC have approved the application for the merger. The District of Columbia is the only jurisdiction to deny the application, the PSC said, adding that Pepco and Exelon have 30 days to ask the PSC to reconsider its decision.

“In this proceeding, the commission must decide who will control the District’s only local electric distribution company, at a time when our city’s leadership, at the urging of many residents, has mandated that the District must pursue a cleaner and greener future that includes more renewable energy resources and more distributed generation, and at a time when the electric industry is undergoing significant transformation,” Kane said during the open meeting.

“The proposed change in ownership and control of Pepco must also be decided in the context of the public policy contained in District law that requires the electric company to be focused on distribution only, and to operate in a safe and reliable manner on a non-discriminatory basis for all customers and suppliers.”

Kane noted that the proceeding has generated more interest and more active participation by parties “probably than any other proceeding in the commission’s more than a century of operation.”

She said that the PSC respects and has carefully considered the submissions of the various parties and commenters, which include the government of the District and consumer advocates. Most of the parties opposed the transaction and asked the PSC to deny the application. Failing that, Kane added, the parties asked the PSC to impose conditions that would mitigate their concerns.

“As we have been reminded throughout this process, this decision is one of the most significant decisions that the commission will ever make,” she said. “Unlike a rate case, this decision will affect a permanent change in the ownership and control of the District’s local electric distribution company. A rate case lasts only until the next rate case. This decision is forever. It is a decision that the commission must make based on the record before it, not on aspirational goals that cannot be demonstrated.”

The companies were free to meet with the parties to see if their objections could be resolved and a settlement could be reached, she said, adding that no settlement was brought to the PSC. At the close of the record, in the positions taken in final briefs, the opposition to the proposed merger did not change, even as the joint applicants added additional commitments as a result of settlements reached in other jurisdictions to address concerns that were raised, she said.

Kane said that the PSC considered the effect of the proposed merger on seven factors to determine if the proposed merger is in the public interest:

·      Ratepayers, shareholders and the financial health of the utilities – standing alone and as merged – and the District’s economy

·      Utility management and administrative operations

·      Public safety as well as the safety and reliability of services

·      Risks associated with all of the joint applicants’ affiliated non-jurisdictional business operations, including nuclear operations

·      The PSC’s ability to regulate the new utility effectively

·      Competition in the local retail and wholesale markets that impacts the District and its ratepayers

·      Conservation of natural resources and preservation of environmental quality

To assess the transaction as a whole, and make the public interest determination that is required, the PSC must find that the proposed merger benefits the public rather than merely leaves it unharmed, balancing the interest of shareholders and investors with the interest of ratepayers and the District community at large, she said.

Noting that the joint applicants “have put forth arguments to counter each of the criticisms and concerns raised,” Kane said that as the proponent of the proposed transaction and the approval of the order that is being sought, the joint applicants bear the burden of persuasion.

The PSC, Kane said, finds that the impact of the proposed merger is a mixed one. There are a few elements of the proposed merger that produce a clear and tangible direct benefit — most notably, the $1.6 billion premium that would be paid to current Pepco Holdings shareholders to buy out the interest of the current shareholders at no cost to District ratepayers, and the offer of a $33.75 million customer investment fund, which could be used by the PSC to fund a beneficial purpose of the PSC’s choosing.

While the joint applicants have persuaded the PSC that not everything that has been argued by the opponents of the proposed merger is true, the record in the proceeding persuades the PSC that there are a number of effects of the proposed merger that are neither beneficial nor harmful. That is, they are neutral, Kane added, noting that there are also some effects of the proposed merger that are harmful or that have a reasonable potential for harm.

“For example, we found no benefit in the offer of increased reliability at a capped cost because it offers no increased reliability under our electric quality of service standards,” Kane said. “Rather, it relies on the increased reliability of the DC PLUG, or undergrounding initiative that began before the merger application was submitted, and it has terms and conditions that have already voided the cap that was offered.”

The PSC also found no benefit to District ratepayers in a new management structure that did not include the Pepco regional president in the executive committee for Exelon utilities, thereby diminishing Pepco’s influence within the new structure, she said.

“[T]hat would result in a more complex regulatory structure that would negatively impact the commission’s ability to regulate Pepco,” she said. “Pepco would become a second-tier company in a much larger corporation whose primary interest is not in distribution but in generation. At a time of change in the energy field, Pepco’s ability to adapt will be constrained by increased management bureaucracy. We are also concerned about the inherent conflict of interest that might inhibit our local distribution company from moving forward to embrace a cleaner and greener environment.”

Kane continued: “[W]e conclude that the joint applicants have not met their burden of persuading this commission that the proposed merger is in the public interest …. Therefore, the application is denied.”

Fort said during the meeting: “This was a hard decision for me to make, made more difficult by the excellent advocacy of all of the parties who appeared and participated in the proceeding. I want to publicly acknowledge them and thank them for all of their hard work. … We all benefit when an engaged public follows the important issues that impact our lives. I encourage everyone to continue to engage with the commission as we continue to further our mission and work to help shape our energy future in the District of Columbia.”

Phillips said: “I agree with my colleagues that the merger application, as filed, is not perfect. However, I am disappointed in the loss of the many opportunities inherent in the proposed merger that could have achieved benefits – tangible benefits – for our local communities and across the region.”

He also commended the parties and community on advocating their positions so strongly, and said, “This case must be viewed in a manner that looks at the regulatory landscape of electric regulation and with a perspective that changes in innovation, technology and the environment are transforming the electric industry.”

Noting that other regulators have approved the proposed merger, he said: “[M]y preference would have been to not only set forth the merger’s defects, but to also offer how those defects could have been cured, either by proposing conditions or proposing guidance for future transactions. In the past, that has been the practice of this commission, and the overwhelming majority of commissions on the state and federal level.”

Accordingly, he said, he will issue a separate opinion concurring in part and dissenting in part with the PSC’s order.

Kane, also noting the number of community and evidentiary hearings that were held, as well as the extensive record in the proceeding, thanked all involved and said: “I have absolute confidence that the process followed by the commission has been full, has been adequate and has been appropriate. The commission has had a full and public record on which to make a decision, which we have done today.”

She also noted that the PSC’s order will be publicly available by the close of business on Aug. 26. A summary of the decision may be accessed at the PSC's website.

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