Exelon, Pepco Merge to Form Nation’s Largest Investor-Owned Utility

Published On
Mar 15, 2016

On Wednesday, Mar. 23, the District of Columbia Public Service Commission voted two to one to approve a $6.8 billion merger between Pepco Holdings and Exelon, creating the largest investor-owned utility in the nation. Combined, the two utilities will now serve 10 million customers.

Chicago-based Exelon has the largest number of nuclear reactors in the nation, with operations throughout the Mid-Atlantic, New England and Midwest. Pepco is (was) an electric utility, serving customers in the Washington, D.C. and surrounding areas.

The sheer size of the merger is expected to change the national utility landscape, according to an article in the March 23 issue of The Washington Post.

Two utilities first proposed the merger in 2014, and the proposed merger had already been approved by the Federal Energy Regulatory Commission, the U.S. Justice Department, and the public service commissions in Maryland, Delaware and New Jersey. Standing in the way of completion, though, was the DC Commission, which first voted the proposal down in August 2015 and then again in February 2016.

As such, yesterday's deal came about somewhat unexpectedly, most recently as a result of increased opposition from Mayor Muriel Bowser of Washington, D.C., and other city leaders. One concern the mayor and others had is that it is expected that current Pepco residential customers will see higher rates, which is what happened to utility customers in other cities in the past following Exelon acquisitions of those utilities. In addition, millions of dollars that Mayor Bowser had wanted to earmark to cushion residential customers from rate increases could now instead go toward credits for businesses or the federal government.

Another concern came from environmental groups, which suggested that a merger would divert Pepco from a path toward more renewables (wind and solar), given Exelon's reliance on a massive fleet of nuclear power and natural gas generating stations.

Just as there was opposition, though, there was also support, particularly from business leaders in Washington, who actively lobbied for the merger, believing that it would make the city more business-friendly. For example, one reason regulators approved the merger was because it would add commercial customers to a rate relief plan, which had only included residential customers under Pepco's original plan.

Businesses also like the strength of Exelon. That is, the merger offers the ability to add significantly more power resources (from Exelon's massive power grid) to the region that has been served by Pepco.

"It gives us more resiliency against storms, cyberattacks and more," said James C. Dinegar, president of the Greater Washington Board of Trade, in the Washington Post article. "It also gives us quicker restart time, because resources are closer."

The two utilities acted quickly on hearing the news, completing and filing paperwork that same day, and eliminating Pepco stock from the New York Stock Exchange as of Thursday (with shareholders receiving appropriate compensation).

As part of the deal, Exelon agreed to provide slightly over $100 million (about $50 a customer) to Pepco's customers for benefits such as rate credits, assistance for low-income customers, and energy-efficiency measures. In specific, this includes a deposit of $72.8 million in a "customer investment fund," $11.25 million for energy efficiency and conservation programs targeted to low-income residents, and another $21.55 million for pilot projects such as modernizing the electric distribution grid.

"These benefits would not be available to District ratepayers if the merger is not approved," said the D.C. Commission in a statement.

The future? While the deal has been approved, stakeholders can still seek a stay on the Commission's ruling, and Mayor Bowser has yet to say whether she would attempt to do so.

"It appears the Public Service Commission favors government and commercial ratepayers over D.C. residents," said the mayor in a statement. "Instead of a three-year rate increase reprieve that we negotiated, it appears that D.C. residents will be hit with a rate increase as soon as this summer."

If the deal does stay in place, the implications are significant. An article in Wednesday's The Baltimore Sun noted that the deal provides Exelon with the steady, regulated earnings of Pepco, to help offset the losses at its nuclear power plants.

"It also follows a trend of consolidation within the U.S. utility industry as power companies face tepid electricity demand, lower energy prices, and rising costs to upgrade old equipment and comply with pollution regulations,” the article stated.

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