The Exelon-Pepco merger: Inside the debate over what may soon be America's biggest utility
The December meeting of the District of Columbia Public Service Commission (PSC) was packed to capacity. Men in suits sat in tight rows, sweating in plastic seats, fidgeting with their neckties. Protesters lined the back of the room, holding signs that read ‘#STOPEXELON’ and ‘BAD DEAL FOR D.C.’ The press pen was a cramped corner of carpet. Utility Dive had to push past a crowd of would-be testifiers just to get in the room.
Washington, D.C., may be a political town, but even here the PSC meetings aren’t usually well attended. The occasion on this day was the city's first public hearing on the proposed acquisition of Pepco Holdings by the Exelon Corporation.
Exelon representatives sat in the front row of the meeting as residents stepped up to testify about the merger. More than 60 people were slated to give their input before the meeting, and dozens more signed up as it began. The testimonials stretched for hours into the night.
Exelon saw significant support, much of it from minority-owned businesses pleased with the utility’s outreach efforts, but most spoke against the merger. Many of the dissenters belonged to a new advocacy group, Power DC, founded the same day as the PSC meeting. The group is a coalition of progressive activists from throughout the city bent on preventing the Exelon merger. Since that day, their members have attended every meeting of the District’s utility regulators, hoping their persistence can outweigh Exelon’s financial heft and recent regulatory successes.
The reasons that residents gave for opposing the merger varied widely, ranging from free market competition to distributed energy and financial risk, but they all boiled down to a single argument — the merger is not in the public interest. Whether the activists can convince mid-Atlantic utility regulators to put the brakes on the acquisition may be the final question for a historic merger that’s now been approved by two states and federal regulators.
Exelon’s game plan
Pepco is a transmission & distribution utility that provides power to about 2 million ratepayers in D.C., Maryland, Virginia, Delaware and New Jersey. Exelon is a vertically-integrated utility based in Chicago, the third largest in the country by number of customers. If the deal goes through, Exelon would become the largest electric utility in America by the size of its customer base, operating almost completely in the PJM Interconnection.
That District residents are showing such opposition to the merger must have been somewhat surprising to Exelon officials. Even before a series of strong summer storms knocked out power to thousands in the D.C. Metro area in 2012, problems with reliability and resiliency at Pepco have been at the forefront of D.C. energy policy and angry residents’ minds.
In response, Exelon made electric reliability its main selling point for District and Maryland residents. While acknowledging that Pepco has made strides in improving reliability since the storms, Exelon says it can do even better.
“Lots of progress has occurred since 2010, but there’s lots more to do,” Melissa Sherrod, Exelon's vice president of corporate affairs, told Utility Dive in an interview. “That’s where Exelon comes in with our expertise and the successes we’ve had at our other utilities.”
Sherrod referred to Baltimore Gas & Electric, a recently-acquired Exelon utility that she said went from having a poor reliability record before the acquisition to becoming a national leader in only two years. Exelon can help Pepco hit its goals faster as well, she said.
“We’re allowing Pepco to make progress by enhancing what they had planned to do,” she said. “We’re helping them get there faster by reducing the frequency that they have outages, and more importantly, when there is an outage we will restore faster because we have greater resources.”
Opponents of the merger say it’s not so straightforward. Sandra Mattavous-Frye, the D.C. People’s Counsel, says Exelon’s has not formally committed to higher reliability standards, and that their plan is actually inferior to Pepco’s.
“In the [Public Service] Commission’s standards there are specific guidelines that the [utility] company is mandated to achieve by 2020,” she told Utility Dive at the meeting. “In the application that Exelon filed with respect to the SAIDI [System Average Interruption Duration Index] metric, they indicated that they would not be able to meet the mandate established by the commission.”
For District regulators to approve the merger, Exelon must demonstrate tangible benefits to the public, not just that no harm will be done. While her office, which advocates for District consumers, is against to the acquisition, Mattavous-Frye said she is not categorically opposed to utility mergers. For her, Exelon’s application simply doesn’t go far enough to prove that customers will see significant reliability improvements and protections from large rate increases.
“They are proposing a $50 [one-time] credit to consumers,” she said. “That’s nothing. In 2000, when Pepco sold off their plants, consumers got $75 and we thought that was nothing.”
“If those are the type of benefits that they’re offering, they simply aren’t enough,” she concluded.
Despite Pepco’s past outages, most of those opposed to the merger lined up to speak not about reliability, but about the dangers of utility consolidation and how Exelon views renewable energy.
Tyson Slocum, director of the energy program at Public Citizen, says the merger will fundamentally alter Pepco’s business model from a transmission and distribution company to the subsidiary of a vertically-integrated utility with a large generation fleet. He is worried that this change will hamper the development of distributed generation in Pepco’s territory as Exelon will want ratepayers to ultimately consume electricity generated by centralized, Exelon-owned power plants.
Under its current business model, Slocum told Utility Dive, “Pepco doesn’t really care if you’re supplying electricity to the grid or if Pepco has to buy electricity from you, or has to buy electricity from Exelon. It’s not going to matter for Pepco’s bottom line.”
“But if Pepco is a direct subsidiary of Exelon,” he said, “then that changes them from being neutral to being advocates of any policy that is going to prioritize electricity sales from Exelon.”
Compounding the issues for opponents of the merger is Exelon’s record on renewable energy. The utility says it supports greener sources of energy like wind and solar, but activists claim their rhetoric is belied by their lobbying actions.
“Exelon is manifestly opposed [to distributed generation and renewables],” Tim Judson, executive director of the Nuclear Information & Research Service, told Utility Dive. Both Judson and Slocum are Power DC members.
Exelon was kicked out of the American Wind Energy Association in 2012 due to its highly-visible lobbying efforts against the wind production tax credit, Judson points out. The utility’s head lobbyist outlined their opposition to renewable energy subsidies back in April 2014, saying they would lobby against the wind production tax credit first and then go after the solar investment tax credit. “This year it’s the wind industry," said Joseph Dominguez, Exelon's SVP of Policy and Regulatory Affairs. "Next year it’s the solar industry."
Exelon’s support of renewables is clear, Sherrod said, as they are part of its generation mix. If the public has doubts about its commitment to the environment, they need look no further than the utility’s subsidiaries, she added. Both Baltimore Gas & Electric and PECO have thousands of net metered customers and over 50 MW of distributed generation.
“In fact, we have a large distributed generation rooftop solar [facility] that we installed at Dunbar High School right in the District,” she said, “and we also have the largest solar installation in Maryland at Mount St. Mary’s University. So we are very much supportive of it.”
But for opponents, Exelon's renewable energy record is one of doing the minimum required, rather than pushing clean energy themselves. The reason Exelon has greener options in its fuel mix, Judson said, is that many of the states it operates in have renewable portfolio standards. He points to a recent CERES survey that ranked Exelon 22nd out of 32 major utilities based on percentage of 2012 electricity sales coming from renewable energy.
“What Exelon has done has really only been driven by state policy,” he said. “They have less than 3% efficiency and less than 3% renewables in their retail electric sales. In fact, they’re doing a lot less than even Pepco. Pepco has more than 3% of its retail sales as renewable energy.”
Consolidation breeds contempt
Critics of the merger have raised concerns about the effects of energy market consolidation. As Judson points out, a post-merger Exelon would be the largest utility in the country, all in the PJM Interconnection.
Sherrod says anti-competitive concerns are overblown because Pepco owns no generation.
“This merger will not affect competition and will not reduce [customers’] opportunities to choose who they receive their electricity from,” she said. “Pepco is a deliverer of electricity so what they do in their territory is deliver the electricity. That doesn’t change.”
Opponents aren’t so sure. They worry that Exelon’s size will let it have an outsized impact on rulemaking in PJM and the states in which it operates.
“The way these markets are run … is through a stakeholder process where the PJM board takes the input of the various companies and stakeholders that participate in the market,” Judson said. “If Exelon accomplishes this merger, Pepco will no longer be an independent entity with a voice in those discussions, and Exelon will be consuming a lot more air in the room.”
Policymaking on the state level presents similar issues to Slocum. He says that if the merger is approved, Exelon will control 85% of the electricity system in Maryland, putting them in a position to “exert significant political and economic influence.”
The same would be true in D.C., where Exelon would have a complete monopoly. Slocum says that while Pepco is the sole utility for the District today, Exelon’s business model makes a difference.
“Now you have an entity that will not only control the distributional delivery of electricity but also controls by far the largest amount of wholesale electricity sales in the region,” he said. “And so you’ve got regional consolidation as well as political consolidation, and that’s a problem.”
For Sherrod, consolidation matters little for a utility with a service area spread over multiple states. Regulators in D.C., Maryland, New Jersey and elsewhere would all have oversight over Exelon subsidiaries.
“On competition issue, I think the regulatory framework is strong and supports and reinforces and mitigates any concerns that people will have from that aspect,” she said.
A deeper problem with the consolidation, activists say, is that it would expose Pepco ratepayers to the financial risks of Exelon’s generation portfolio. The Chicago utility is currently lobbying the legislatures in New York and Illinois to guarantee income from nuclear power plants it says would otherwise be unprofitable.
“[If] Exelon formulates a plan to set up a subsidy situation like they’ve proposed in Illinois … Pepco is going to be a cheerleader for that because Pepco is part of the Exelon family if this merger goes through,” Slocum said. “That places ratepayers directly at risk.”
In fact, many critics say the reason Exelon sought to acquire Pepco in the first place is to mitigate for a risky generation portfolio filled with unprofitable nuclear plants. Adding nearly 2 million ratepayers to the company, the logic goes, goes a long way to making Exelon’s books look more balanced.
“They’ve got serious problems with the performance of their business right now essentially because of the financial problems plaguing their nuclear fleet,” Judson said. “They’ve talked openly about the purpose of this merger really being to derive other sources of revenue, and we think this exposes D.C. ratepayers to really a risk they haven’t been exposed to before.”
“They will have to be responsible for paying for these old nuclear plants,” he said.
Sherrod says the risk argument is a red herring. Exelon, she said, has proposed a mechanism in its application called “ring fencing” to shield D.C. residents from any risk associated with its nuclear plants. As the name suggests, "ring fencing" legally walls off the assets of a subsidiary from its parent company and its businesses. Sherrod says Exelon used the provisions successfully to protect Constellation customers when Exelon bought the company.
“That is what I would call a premium way of ensuring that no risk of any other affiliate will impact the operations of Pepco,” Sherrod said, “so for all intents and purposes they are essentially a standalone company financially.”
The Exelon executive also points out that rate increases would still be decided on a state-by-state basis, and that regulators can always decide to turn requests down.
"The electric rates are based upon the information that the PSC reviews and approves and the PSC will not approve a review of information that we’re putting in there for another jurisdiction,” she said. “What every single PSC will do is assess the standalone financial reports for each one of the entities to make sure that the costs that are being assessed are being driven by that specific entity.”
Unsurprisingly, Judson sees things differently. He says the proposed ring fencing provisions do not actually apply to the situations opponents are worried about, such as Exelon pushing state regulators to subsidize its nuclear plants.
“I don’t think that any of the ring fencing provisions that they’re proposing have anything to do with that kind of an eventuality,” he said. The provisions, according to Judson, are meant to ensure Exelon does not mix its regulated and unregulated businesses. He's doubtful whether they would protect ratepayers from the risks of Exelon's generation portfolio.
“Exelon still basically operates as a vertical monopoly in a sense,” Judson continued, “but half of that is unregulated, and the ring fencing provisions are essentially a promise to the regulators of the regulated business that they won’t seek to cross the wires, so to speak.”
What’s next for Exelon
While it’s clear Exelon will never be able to assuage the concerns of many D.C. activists, the merger is moving through the many hoops of the regulatory approval process. New Jersey regulators signed off on the deal on last week, and FERC approved the deal in November. The Virginia Corporation Commission gave its blessing the month before that.
Other than in D.C., only Maryland and Delaware regulators have raised serious concerns about Exelon’s plans. Last month, the Maryland Office of People’s Counsel rejected the merger and the staff of the Public Service Commission recommended further conditions on the deal if it is to be approved. Maryland residents have until Feb. 17 to file comments, after which the PSC can make a decision.
The Delaware PSC will hold a three-day hearing on the merger beginning Feb. 18. Critics there have already been challenging Exelon’s planned consumer credits and economic impact studies, the Delaware News Journal reports. Nearly 190 legal filings and public comments had been filed with the PSC there at the beginning of 2015.
As in Maryland, the staff of the Delaware PSC has recommended more conditions on the merger, including a $40 million investment in energy efficiency, job protections for workers in the state, solicitations for up to 200 MW of renewable energy, funds for an offshore wind study, and a one-time $50 consumer credit as Exelon has promised D.C. residents. Exelon officials say the conditions “would completely wipe out [Pepco subsidiary] Delmarva Power’s earnings for years.”
The final public hearing in the District on the proposed merger is Jan. 20, but residents and groups have until March 26 to file written comments with the PSC. The filing schedules for state and District regulators imply that final decisions on the merger will not come until late spring at the earliest. Exelon has said it hopes to complete the acquisition in the third quarter of 2015.
If regulators are uncomfortable with the merger, there are alternatives, Slocum said.
“The fact of the matter is that there were at least four other offers to purchase Pepco from other utilities,” he said, “and most of those other offers came from utilities that, like Pepco, don’t own any generation.”
“Regulators have options," he added. "If they reject this one, there’s going to be utilities willing to step up."
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