The merger of Exelon Corp. and Pepco Holdings Inc. was thrown into limbo yesterday after the District of Columbia Public Service Commission unanimously rejected their $6.8 billion merger.
The three-member commission concluded the deal is not in the public interest, citing Exelon’s size and presence as one of the nation’s largest merchant generators as impediments to Pepco’s "ability to adapt" to changes in the electricity industry.
"Pepco will become a second-tier company in a much larger corporation whose primary interest is not in distribution, but in generation," PSC Chairwoman Betty Ann Kane said. "At a time of change in the energy field, Pepco’s ability to adapt will be constrained by an 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 said as she read aloud a summary of the decision.
The commission vote, cheered by opponents including consumer and environmental groups, presents a regulatory roadblock and throws into question a merger proposed last April that would have created one of the nation’s largest utilities.
Reaction to the decision quickly rippled through Wall Street: Pepco shares plunged 16 percent on investor concerns the deal might collapse. Exelon fell 6 percent.
In a joint statement, the companies said they are considering their next move. According to Exelon regulatory filings, the company would be required to pay an unspecified termination fee if the merger agreement is canceled because of a regulatory failure.
The companies have 30 days to ask the PSC to reconsider yesterday’s decision. Or they could try to satisfy some of the objections raised by the commission, members of the D.C. City Council and local groups, and refile or try to reach a settlement.
"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 companies said in the statement. "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."
Paul Patterson, an analyst at Glenrock Associates LLC in New York, expects the commission’s final order, expected to be available by the end of today, could yield some clues about the pathway for Exelon to get the transaction back on course.
"I wouldn’t underestimate [Exelon’s] desire to do the deal," he said. "But it’s not without its procedural challenges, especially at this late stage."
Merchant business move backfires on Exelon
Chicago-based Exelon announced in April 2014 an agreement to purchase Pepco’s utilities to form the nation’s largest utility owner with 10 million customers across the Midwest and Mid-Atlantic and nearly $30 billion in combined revenue.
The Pepco buy was seen as a way to increase a shift by Exelon toward more stable rate-regulated electric delivery utilities and a move away from its massive merchant business, which has been subject to sagging power markets.
Ironically, it was the presence of Exelon’s sprawling generation fleet and questions about whether the utility operations would take a back seat that caused concern among commissioners.
While the commission did note some potential benefits of the combination, it also determined that some effects would harm ratepayers, notably a management structure that didn’t include Pepco’s regional president on the Exelon Utilities executive committee.
The effect would be to diminish "the influence of Pepco within the new structure and that would result in a more complex regulatory structure that would negatively impact the commission’s ability to regulate Pepco," the commission said in its decision.
Kane said she’s not going to guess how the companies will respond.
"Anything else [Exelon and Pepco] want to do is up to them," she said. "And I’m not going to speculate on what they could do; I think the order speaks for itself."
No settlements for D.C.
The D.C. PSC was the last regulator to vote on the proposed transaction, which had already won the blessing of the Federal Energy Regulatory Commission and state utility commissions in Virginia, Delaware, New Jersey and Maryland.
In some states, including Maryland and Delaware, approval was the product of settlements among various parties and made contingent on Exelon satisfying dozens of conditions.
Those settlements would require Exelon to expend in excess of $300 million, covering rate credits, funding for energy efficiency programs, sustainability funds, charitable contributions and other required commitments.
There was no such agreement put before the D.C. commission.
"Because there was not a settlement, we had to look at the record before us," Kane told EnergyWire in an interview after the meeting.
The PSC evaluated the merger against seven "public interest factors." Those included effects of the transaction on ratepayers and shareholders, on competition in the local retail and wholesale markets, and on conservation of natural resources and preservation of environmental quality.
Power DC, a coalition of local interest opposed to the deal, urged Exelon not to pursue the acquisition further. The group said it "would have been a substantial step backwards in the District’s efforts to move toward more sustainable electricity generation and greater reliance on local, renewable energy" and "exposed D.C. residents and businesses to the risk of steeply rising electricity bills."
The merger application was the third in the last 20 years involving Pepco, Kane said. One in 1997 that never materialized involved Baltimore Gas and Electric Co. In that case, the commission opposed the deal "but set conditions that it believed would make it acceptable. And those conditions were not acceptable to the applicants, so that merger never occurred."
Another in 2002 that did get approval was the deal that created Pepco Holdings.
Exelon, meanwhile, has been building out its presence in the Mid-Atlantic for the last decade and a half, purchasing Philadelphia-based PECO Energy Co. in the deal that created Exelon, and adding Constellation Energy Group, the parent of Baltimore Gas and Electric, in 2012.
The company also hit a regulatory roadblock in its bid to expand utility holdings. In 2005, the company announced an agreement to acquire New Jersey-based Public Service Enterprise Group Inc., but it pulled the plug more than a year later after it became apparent it wouldn’t win approval from state regulators.
In the case of the Exelon-Pepco deal, at least one commissioner expressed regret in parties not being able to settle their differences and deliver a settlement that the commission could vote on.
"I agree with my colleagues that the merger application as filed is a bad deal for the District," Commissioner Willie Phillips said. "However, I am disappointed in the loss of the many opportunities that could have achieved benefits for our local communities and across the region."