By Thomas Heath and Aaron C. Davis March 23, 2016
District regulators approved a $6.8 billion merger between Pepco Holdings and Exelon on Wednesday, creating the largest publicly held utility in the country.
The decision marked a surprising turn of events for the deal, which D.C. regulators had rejected twice and which appeared to be on life support in recent weeks as D.C. Mayor Muriel E. Bowser (D) and other city leaders lined up in opposition.
The merger means that Pepco will be absorbed by a company with the largest number of nuclear reactors in the country and widespread operations throughout the Mid-Atlantic, Midwest and New England.
The sale affects about 2 million Mid-Atlantic electric customers who are served by Pepco Holdings, including more than 815,000 ratepayers in the District and in Prince George’s and Montgomery counties.
And it is widely expected that those customers will see higher electric rates — possibly as soon as this summer — as has happened in Baltimore and other cities after Exelon acquired energy distributors. Pepco has not sought annual rate increases since 2014, when Exelon first proposed its takeover of Pepco, despite having made capital improvements.
The proposal had been closely watched by environmentalists, utility and public-service lawyers and financial analysts across the country. Because of its size, the deal is likely to change the national utility landscape.
It was also seen as a test of strength for the business community in Washington, which lobbied hard for the merger and wants to promote the nation’s capital as business-friendly.
In voting 2 to 1 to approve the deal, the D.C. Public Service Commission said it “was in the public interest,” noting that the utilities would deposit $72.8 million in a “customer investment fund,” set aside $11.25 million for energy efficiency and conservation programs targeted toward low-income residents and carve out $21.55 million for pilot projects, such as modernizing the electric-distribution grid.
“These benefits, among others, would not be available to District ratepayers if the merger is not approved,” the commission said in a statement.
But under terms approved by the commission, millions of dollars that Bowser had wanted to cushion residential customers from rate increases until 2019 could instead go to credits for businesses or the federal government.
Neither Pepco nor Exelon claimed victory after the vote, in part because stakeholders can seek a stay on the order’s implementation.
The utilities wasted no time in completing the merger, announcing late Wednesday afternoon that both sides had completed and filed the paperwork. Pepco stock would cease to exist as of Thursday, with shareholders receiving $27.25 per share.
“Today, we join together as one company to play a vital role as a leader in our industry and the mid-Atlantic region,” Chris Crane, Exelon’s chief executive, said in a statement.
Joseph M. Rigby, previously chairman, president and chief executive of Pepco Holdings, officially retired Wednesday. He was replaced by David M. Velazquez.
Bowser and other officials did not say whether they will try to squash the merger. In a statement, the mayor said residents should brace for higher electric bills. “It appears the Public Service Commission favors government and commercial ratepayers over DC residents,” the mayor wrote. “Instead of a three year rate increase reprieve that we negotiated, it appears that DC residents will be hit with a rate increase as soon as this summer.”
Anya Schoolman, head of the nonprofit group Community Power Network and an opponent of the deal, said she was “shocked” by the reversal.
Power DC, an umbrella group of community organizations that opposed the merger, voted to fight on. “By approving the merger, the PSC has exposed our city to decades of higher rates, weakened its own ability to guide our city’s energy future, and helped ensure that DC will fall behind the rest of the US on clean, efficient energy,” the group said.
D.C. Council member Mary M. Cheh (D-Ward 3), a fierce opponent of the merger, blasted the commission for the reversal.
“What we’re doing here is fundamentally not in the public interest for the ratepayers or people of the District of Columbia,” she said. “I’ll tell you who the beneficiaries are, quite plainly: It’s Exelon and the shareholders of Pepco who get a big windfall out of this. Those are the people who won. . . . The rest of us, we lost.
“Exelon is a power generator who wants to sell more power,” she said. “We want to encourage less energy use and conservation — it’s a conflict.”
But the business community celebrated.
James C. Dinegar, president of the Greater Washington Board of Trade, called the decision “a catapult for the region . . . as a place to do business because now we have the strongest, best power company in the country.”
The merger would add resources to the local power equation, he said. “It gives us more resiliency against storms, cyberattacks and more. It also gives us a quicker restart time because resources are closer,” he said. “I don’t have to wait on Texas and Tennessee to provide reserves.”
Former D.C. mayor Anthony A. Williams, now the chief executive of the Federal City Council, a nonprofit group that seeks to influence local affairs, lobbied hard for the merger in recent weeks.
“We’re happy with the commission’s decision for both residents and employers in D.C.,” Williams said through a spokesman. “The merger is a win for reliability, financial integrity, sustainability and corporate responsibility.”
The PSC’s approval had been the final hurdle to the merger, which had been approved by the Federal Energy Regulatory Commission, the Justice Department, and the states of Maryland, Delaware and New Jersey.
The fact that the District was the last to act, combined with a somewhat complex regulatory landscape, made the city especially challenging, Dinegar said.
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The deal means the end of independence for an institution with roots in the late 19th century, but it could bring improved service for consumers and a modest premium for Pepco shareholders.
The all-cash transaction is based on a $27.25 share price that represents a 24.7 percent premium on Pepco Holdings’ closing price of $21.85 on April 25, 2014, when the deal was announced.
That valued the deal at about $6.8 billion, based on the number of outstanding shares reported in Pepco’s most recent securities filing. Exelon also agreed to provide up to $100 million — or about $50 a customer — to give Pepco customers such benefits as rate credits, assistance for low-income customers and energy-efficiency measures.
Debate centered on the role of renewable-energy sources — such as wind and solar — against legacy technologies, such as nuclear power and natural gas. Many environmental groups opposed the deal because they believed it would hinder the migration toward renewable energies.
The proposal was part of a larger trend of utilities undertaking strategies that lower their exposure in competitive power markets in favor of owning regulated utilities that have more predictable, if lower, revenue streams.