Utility Giant Exelon Seeks Pepco Holdings Merger
By Jessica Christy
In April 2014, Exelon Corporation, the nation’s fifth largest utility company ($28.7 billion market share) offered to purchase Pepco Holdings, Incorporated (PHI) for $6.8 billion, creating the nation’s largest utility with 10 million customers and $26 billion in regulated revenue. The service areas for these utilities include MD, IL, PA, DC, DE, NJ, and VA. Exelon’s profits, mostly from nuclear power generation, have decreased 40% since 2007, so the shift into a regulated market, with its guaranteed income, makes economic sense.
Exelon’s Byron Nuclear Power Station. Photo by Bill & Vicki T on Flickr.
Unsurprisingly, Pepco shareholders have approved the $1.1 billion windfall. The deal was also approved by the boards of Exelon and PHI, the regulatory bodies of NJ and VA, the Federal Energy Regulatory Commission (FERC), and tentatively with the regulatory body of DE. The deal still requires approval from the Public Service Commissions of MD and DC. The companies hope to win approval from all agencies by the fall of 2015.
Pepco claims that the merger will improve outage response time, reduce the number of outages, provide money for low-income customers, and continue to support local charities to the tune of $50 million. Others, including Maryland Attorney General Brian E. Frosh and the Institute for Energy, Economics, and Financial Analysis, believe PHI customers will experience frequent rate hikes, decreased reliability, and an understated role for renewables.
Rate Hikes May be Necessary to Financially Justify Acquisition
As PHI’s assets are estimated at a value of $4.3 billion, Exelon is paying a $2.5 billion acquisition premium, which creates pressure to justify the price tag. DC’s request for a moratorium on rate hikes for five years after the merger was rebuffed, leaving customers to wonder if they will see rate increases to support the acquisition premium. Consumers can examine Exelon’s behavior surrounding the acquisition of BG&E in 2012, which included the condition that savings from the acquisition would be passed on to consumers. Since then, Exelon has requested a total of $369 in rate hikes on electricity ($136 approved) and $221 in rate hikes on gas ($162 approved). While past behavior is no guarantee of future performance, it’s difficult to imagine that this merger will play out differently, especially considering the stronger conditions placed on the BG&E deal.
To address these concerns, Exelon increased its offers to $94.4 million for MD’s Customer Improvement Fund ($130 per customer), $49 million for DE’s direct customer benefits fund ($160 per customer), and $33.75 million for DC’s customer investment fund ($132 per customer). Despite these investments, it’s unclear whether consumers will see a net benefit from the merger.
Photo by Tam Tam on Flickr.
Improved Reliability Not Guaranteed
Exelon’s standards for reliability are less stringent that the current plan and provide no independent method to incentivize reliability improvements. According to Exelon’s own testimony, it does not have a firm engineering plan for improvements, but, after the merger, will spend six months assessing conditions in the field to determine what improvements can be accomplished, when, and at what cost. Exelon would not institute any reliability targets for 2015 through 2017 and has set a goal of increased reliability using a three-year target beyond 2017, which is less strict than the current trajectory. Additionally, if Exelon does not meet these standards, including a significant number of exceptions for changes in law, regulation, and extreme weather anywhere along Exelon’s supply chain; Exelon will determine what penalty, if any, is warranted. Exelon’s internal goals are certainly laudable, but leave customers without any tangible plan for improving reliability.
Renewable Energy Plans De-emphasized
DC has set an incredibly ambitious plan to decrease energy usage by 50% by 2032 and increase renewable energy usage to 20% by 2020. MD’s renewable energy portfolio dictates that by 2022, renewable sources will account for 20% of energy consumption. NJ and DE have made similar plans; however, an Exelon takeover may put a damper on that progress. Exelon, in an effort to protect the profitability of its nuclear energy sources, has opposed efforts to make residential solar panels cost efficient; opposed the wind production tax credit; and lobbied against both DC and MD bills that prioritized renewable energy production and sources. The consistent opposition to renewable energy incentives indicates that Exelon does not and will not support renewable energy plans in PHI jurisdictions. Exelon may not be able to prevent these standards from taking effect, but they may be able to weaken or delay implementation.
When considering the potential negative effects on consumer rates, decreased reliability, and the environment from a de-emphasis on renewable energy sources; DC and MD should reject this deal unless Exelon can provide guarantees, not internal goals, which address these concerns.
**Consumers who are interested in learning more about the merger are invited to attend two panels at the University of the District of Columbia David A. Clarke School of Law on April 8, 2015 from 7-10pm. RSVP here.**
Jessica Christy is a first year law student at the University of the District of Columbia and a mother of three. She’s originally from Colorado, but has lived in DC for almost nine years. Before attending law school, she worked in industrial hygiene, including asbestos litigation and workplace safety. In her spare time, she enjoys beating her oldest child at MarioKart and needlepoint.