Exelon, Pepco float three merger plans to D.C. regulators

Pepco Exelon logos

Exelon and Pepco Holdings, in a March 7 filing, proposed three avenues for the Public Service Commission of the District of Columbia to advance on the companies’ proposed merger.

"We're prepared to deliver the benefits of our original merger settlement or to accept all of the terms the commission concluded would place the merger in the public interest," Exelon President and CEO Christopher Crane said in a March 7 statement. "We have also offered a third option that aims to balance the alternate terms the commission offered in its Feb. 26 order with the views of some of the settling parties on the issue of rate credits to residential customers," Pepco Holdings Chairman, President and CEO Joseph Rigby said in the statement.

"The commission and the settling parties are in agreement that the value of the overall benefits we have committed to the District is appropriate – it's essentially a question of how those benefits are allocated for the District. To safeguard these benefits for the District and its residents, we are putting before the commission several options that will allow the merger to move forward," according to the statement.

As noted in the March 7 filing, the PSC last month rejected the nonunanimous full settlement agreement and stipulation submitted by the settling parties. As TransmissionHub reported, that settlement agreement, which was admitted on to the record of the case on Dec. 2, 2015, was submitted by Exelon; Exelon’s Exelon Energy Delivery Co.; Pepco Holdings; Pepco Holdings’ Potomac Electric Power Co.; New Special Purpose Entity; the Office of People’s Counsel of the District of Columbia; Apartment and Office Building Association of Metropolitan Washington; the District of Columbia Government; the District of Columbia Water and Sewer Authority; the National Consumer Law Center; the National Housing Trust; and the National Housing Trust-Enterprise Preservation Corp.

However, the PSC identified certain modifications to the settlement agreement, set forth in a revised nonunanimous settlement agreement, which, it concluded, would render the proposed merger in the public interest, the joint applicants – that is, Exelon, Pepco Holdings, Potomac Electric Power Co., Exelon Energy Delivery Co. and New Special Purpose Entity — added in their March 7 filing.

The joint applicants said that there is broad agreement that the merger, properly conditioned, is in the public interest and will leave the District and Pepco’s customers better off than they would be without the merger. The settling parties reached that conclusion when they executed the settlement agreement and sought the PSC’s approval. In its February order, the PSC itself agreed that the merger would be “in the public interest” with only limited revisions, which it asked the settling parties to review.

The joint applicants added that now, however, the merger is on the verge of failure because of differing opinions over how a portion of the $72.8 million Customer Investment Fund, which the PSC and the settling parties agreed was sufficient, should be allocated.

The joint applicants said that they have reviewed the RNSA and are ready to proceed with the merger in accordance with its terms. The other settling parties, however, have been unable to agree to the PSC’s conditions, which, according to press releases, appears largely due to uncertainty arising from the PSC’s deferral of a decision on the allocation of a $25.6 million rate credit until Pepco’s next base rate proceeding, the joint applicants said.

“This threatens to derail the merger entirely – destroying all the other benefits – which go well beyond the $72.8 million CIF, that the settling parties and the commission majority agree the merger would bring to the District and Pepco’s customers,” the joint applicants said. “The joint applicants urge the commission to avoid that devastating result and the loss of $78 million of benefits to Pepco customers, along with the many other benefits, including but not limited to enhanced reliability performance and renewable energy investments.”

The PSC has available to it three avenues to do so, all of which are acceptable to the joint applicants. Specifically, the joint applicants added, the PSC can approve the merger in accordance with the terms of the settlement agreement, the terms of the RNSA, or on the terms of a middle ground proposal.

Of the first avenue, the joint applicants said that even if the PSC continues to believe that the terms of the RNSA more strongly further the public interest than the settlement agreement, the joint applicants suggest that the settlement agreement without the PSC’s February order’s alternative terms is also in the public interest. Furthermore, the settling parties have already agreed that any subsequent PSC orders or rulemakings would supersede inconsistent provisions of the settlement agreement.

Of the second avenue, the joint applicants said that PSC precedent permits the PSC to now approve the merger conditioned by the terms of the RNSA as a resolution on the merits without any further steps. If the terms of the RNSA are adopted by the PSC, the joint applicants would continue to actively advocate for use of the customer base rate credit created under the RNSA to offset increases in rates to residential customers.

As PSC Commissioner Joanne Doddy Fort said, the terms of the settlement agreement regarding the application of the $25.6 million funding were “rejected without prejudice. Parties are welcome to reassert the same proposal during the next base rate proceeding.”

The joint applicants added that their commitment to fund that offset and to seek its application for the benefit of residential customers in no way impairs the PSC’s fundamental authority to approve just and reasonable rates.

In fact, that funding provides an additional tool for the PSC to pursue a rate design that reduces cross subsidization between rate classes, the joint applicants said.

Of the third avenue, the joint applicants said that under that option, they would accept all of the terms of the RNSA with two modifications.

The PSC’s proposed deferral of a decision, until Pepco’s next base rate proceeding, on allocation of the $25.6 million Residential Customer Base Rate Credit and elimination of the provision to defer recovery by Pepco of any residential rate increase before March 31, 2019, is particularly problematic, the joint applicants said, adding that the PSC’s decision eliminates the certainty of the protection of the District’s residential customers that the settling parties sought to ensure.

The joint applicants said that they believe that the PSC can address its concerns with that base rate credit, as well as the settling parties’ concerns with the terms of the RNSA, through additional alternative terms that preserve the function of the Residential Customer Base Credit and move $20 million in CIF monies from the newly created MEDSIS Pilot Project Subaccount to a separate customer base rate credit fund. The PSC would exercise its discretion to determine how the $20 million fund would be best deployed in the context of Pepco’s next base rate case as it desired.

The joint applicants added that that revision of the PSC’s February order’s allocation does not prevent the PSC from using CIF monies to advance the grid modernization proceedings in Formal Case No. 1130. Instead, the revised allocation provides the PSC with additional discretion over how best to use $20 million of the $72.8 million CIF to advance its competing priorities, the joint applicants said.

The joint applicants said that “[t]hey stand ready to accept whichever of the three avenues identified above … the commission ultimately decides to is most appropriate. It would be tragic if customers lost the $72.8 million CIF and the many other benefits of the merger recognized by the commission and the settling parties because of disputes over how a portion of the CIF should be allocated.

Noting that the need for swift consideration is even more acute, the joint applicants said that they ask for a decision by April 7. The transaction’s financing costs, which a month ago were at $138 million, grow with every passing day, the joint applicants said. Regulatory uncertainty has also caused hundreds of millions of dollars in volatility in Pepco Holdings’ stock prices — in the two-day period following the issuance of the February order, Pepco Holdings lost nearly $1 billion in value — volatility that impacts customers and investors, the joint applicants said.

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