District of Columbia regulators approved a $6.8 billion merger between Exelon and distribution utility Pepco on Wednesday in a 2-to-1 vote.
The eventual approval came nearly two years after the proposal was first filed. It involved many rounds of negotiations between regulators, ratepayer advocates and the utilities. It is a deal that the local ratepayer advocate is unhappy with.
The dissenting vote came from Public Service Commission (PSC) Chair Betty Ann Kane, who has long opposed the merger. “Exelon is not merging with Pepco, rather, it is acquiring it,” she wrote in her dissent when the proposal was first rejected in February. “The result is a structure by which Pepco would be owned and controlled in a manner that does not advance the public policy and law of the District of Columbia.”
The PSC initially rejected the merger settlement in late February, but introduced four conditions that could be met in order for the measure to gain approval. It was that option, known as option 2, which was approved.
“The biggest takeaway from the approval is that these merger proceedings before the PSC can be resolved by sweetening the pot, even in a contested and controversial proceeding like this. Commissioners can be persuaded to approve these petitions when presented with tangible ratepayer benefits, and they’re typically inclined to do so," said Rob Rains, an energy expert with Washington Analysis.
The conditions were as follows:
- Deferring decision on allocation of a $25.6 million customer base rate credit until the next Pepco rate case
- Removing a provision that designates Exelon as the developer of a 5-megawatt solar generation facility at D.C. Water, and requiring Pepco to facilitate the interconnection through a competitive process
- Creating an escrow fund with two subaccounts at Pepco to hold $32.8 million of the proposed $72.8 million customer investment fund created by Exelon in the proposed settlement, which set aside $21.55 million for modernizing the D.C. grid
- Requiring Pepco to facilitate and support microgrid pilot projects under a separate proceeding
One of the most contentious points was whether non-residential ratepayers could get part of a $25.6 million customer credit. The PSC called for the allocation to be determined during the next rate case, but that idea was opposed by some D.C. officials.
D.C. Mayor Muriel Bowser rejected the PSC proposal, saying it did not do enough to protect ratepayers. The District's ratepayer advocate also rejected the latest proposal.
Exelon’s alternate proposal, known as option 3, put together a $45.6 million fund, with $25.6 million for residential rate credits and another $20 million to be used at the PSC’s discretion. The $20 million would have been redirected from a pot of money designated for grid modernization projects, which received pushback from clean energy groups.
Throughout the proceeding, environmental and consumer advocates argued that Exelon's business model undermines D.C.'s clean energy goals. Mike Tidwell, director of the Chesapeake Climate Action Network, said today's ruling sharpens the need for grassroots groups to push for structural change in energy policy and politics.
"Exelon has a vested interest in protecting its aging nuclear fleet at all costs, including suppressing the growth of community-based clean energy and microgrids," he said. "This merger will make it harder for D.C. -- and Maryland -- to fulfill official commitments to address climate change. But we are determined to fight harder than ever to protect our region's clean-energy progress, and to enact laws that keep Exelon from poisoning climate solutions along with our politics.”
Proponents of the deal, including the Greater Washington Board of Trade, the American Federation of State, County and Municipal Employees, and the Greater Washington Hispanic Chamber of Commerce, argued the benefits package will reduce energy bills, make electric service more reliable, and boost the local economy.
Under the approved ruling, each household will receive an immediate credit of $50 as part of the $25.6 million, but that is lower than the rate credits secured in other states where Exelon and Pepco operate. Those credits would not make their way to renters in master-metered buildings, argued Kane in her dissent on February 26.
Pepco will expedite the interconnection of the 5-megawatt solar project planned for D.C. Water. But it will be developed, constructed and installed by a vendor selected by the D.C. government, according to the PSC.
Exelon will act as a developer for another 7 megawatts of new solar generation in the District. It is unclear what Exelon’s role will be in public microgrids, but any plans for microgrids and utility-of-the-future initiatives will have to be reported on annually to the PSC.
The merger deal values Pepco at $27.25 per share, up 36 percent from the company’s $20 stock price prior to the merger announcement.
“The significance is that more firms with merchant exposure will identify regulated businesses to acquire and will be emboldened by Exelon’s ability to secure approval in a difficult regulatory environment. We can anticipate a number of different utility M&A deals going forward, with the vast majority of them being successful," said Rains.
Rains said it's possible that opponents will appeal the merger agreement, but that a challenge is unlikely to succeed. An appeal would have to win on technical grounds, and there is no evidence the PSC committed any procedural violations.
Exelon and Pepco announced Wednesday afternoon that they had completed their merger transaction. The merger officially brings together Exelon’s three electric and gas utilities -- Baltimore Gas and Electric, ComEd and PECO -- and Pepco Holdings’ three electric and gas utilities -- Atlantic City Electric, Delmarva Power and Pepco. The deal includes more than $430 million in direct benefits for customers.
“Today, we join together as one company to play a vital role as a leader in our industry and the mid-Atlantic region,” said Chris Crane, who retains his current position as president and CEO of Exelon, in a statement. “We’ve made a number of commitments to customers in all of the Pepco Holdings utilities’ jurisdictions -- the District, Maryland, Delaware and New Jersey -- and we look forward to getting to work to deliver those benefits to our customers and communities.”