Can the Exelon-Pepco merger be in the public interest?

Frosh's objections to the Exelon-Pepco merger have merit.

When Chicago-based Exelon sought to buy Baltimore's Constellation Energy — and with it, Baltimore Gas & Electric — Maryland was able to secure a strong settlement that included not just a one-time rate credit but also assorted commitments and protections that appeared likely to shield consumers from the long-term risks associated with the transaction. Three-and-a-half years later, the merger still looks like a reasonable deal for BGE ratepayers. Exelon has kept its commitments, most particularly by continuing to ramp up BGE's efforts to improve system reliability and minimize outages after major storms.

But now Exelon is seeking to buy Pepco Holdings Inc., which owns the electric distribution utilities in Maryland's Washington suburbs and the Eastern Shore, and that is another matter entirely. Exelon's purchase of BGE may not have been the disaster some predicted (at least so far), but the PHI deal involves substantially different issues with the potential to impact not just the customers of the utilities that are subject to acquisition but ratepayers throughout the state and region. In a brief filed this month in opposition to the merger, Attorney General Brian E. Frosh raised substantial questions about the concentration of market power and influence that the deal would create, and Exelon has so far not provided satisfactory answers to them.

If the deal goes through, Exelon would have about 80 percent of Maryland's electric utility market through BGE, Pepco and Delmarva Power & Light. Supporters of the deal dismiss concerns that this combination would create an anti-competitive market on the grounds that the utility business is highly regulated and doesn't involve competition in the classical sense anyway. That is true in that BGE and Pepco don't compete for customers, and the rates they can charge for electricity distribution are subject to approval by the Public Service Commission and only after extensive and adversarial hearings.

The real issue is subtler but nonetheless important. PHI is what's known as a "wires company." It divested from its generation assets several years ago and is now in the business of doing nothing but distributing electricity to its customers. Exelon is a hybrid company, as was Constellation. It owns regulated utilities like BGE and PECO in Philadelphia, but it also has an energy trading operation and a large portfolio of power plants, most of them aging nuclear facilities. That means they can and sometimes do have different views on policy issues both in state legislatures and in matters related to PJM Interconnection, the regional transmission organization.

Environmentalists have focused on that fact, contending that PHI is more interested in (or in some cases, less opposed to) distributed generation through small-scale solar and wind projects and energy efficiency efforts. Consumer advocates have argued that Exelon's interest in maintaining the profitability of its nuclear fleet — a challenge in an era of cheap natural gas — will push the combined company to oppose efforts to bring more generation capacity or new transmission lines to the regional grid.

In a recent interview with The Sun's editorial board, Exelon CEO Chris Crane sought to downplay those concerns, saying the company is a major player in renewable energy and does not oppose "Utility 2.0" measures like net energy metering. But it is hard to dispute that Exelon's corporate structure and its need to protect shareholder interests in the profitability of its centralized generation assets do not cause its attitudes and incentives to differ from those of an independent PHI, and that makes this deal different from the merger with Constellation/BGE.

Mr. Frosh raises some other troubling questions, including whether the reliability commitments Exelon is making as part of the merger are, in fact, as good as those Pepco and Delmarva had already agreed to. The PSC has set out strict annual goals for them and other Maryland utilities, but Exelon officials testified during the merger hearings that they would need a period to examine the engineering of the two systems (particularly Delmarva) before knowing what they could accomplish. The upshot is that instead of annual goals, they're proposing to be judged only by their ability to meet a three-year reliability average by 2020. Mr. Frosh also questions a deal that would provide far larger benefits to the companies' shareholders than to consumers.

Theoretically, the PSC could impose conditions on the merger that would address the last two concerns to some extent. But there's no obvious answer as to what they could do about the change the merger would bring to the dynamics of state and regional energy policy debates. Last week, Exelon filed a request, which the PSC granted, to exceed the 60-page limit for its brief in reply to Mr. Frosh, Maryland's Office of the People's Counsel and other parties that have objected to the merger. That's good because the company has a lot of explaining to do if it is to make the case that this merger serves the public interest, as the law requires.

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