The merger of Exelon, the parent of Baltimore Gas and Electric Co., and BGE neighbor Pepco Holdings took an awkward step toward consummation Friday when the Public Service Commission of the District of Columbia again rejected the proposal but left the door open for a merger with some new conditions.
The $6.9 billion merger would create the nation's largest utility, serving a combined 8.5 million customers, including most of Maryland. Exelon has owned BGE since its 2012 merger with Constellation Energy and would gain Pepco, which serves D.C. and its Maryland suburbs, and Delmarva Power in a merger with Pepco Holdings.
The Maryland Public Service Commission approved the merger in a 3-2 vote last May, and it has been approved by other state and federal regulators. But the deal ran into head winds in D.C., where its PSC rejected an earlier merger proposal in August.
The utility companies promised greater investment in the District and struck a new settlement with the backing of D.C. Mayor Muriel Bowser and other stakeholders.
On a 2-1 vote, the D.C. PSC rejected that deal Friday. But the regulatory body then voted to send the proposal back to the companies with changes, including requiring new penalties if the utility doesn't comply with certain conditions. It gave the companies and other stakeholders 14 days to decide whether to accept the revised deal.
"The Commission's order prescribes new provisions that we and the settling parties must carefully review to determine whether they are acceptable," Exelon spokesman Paul Adams said in an email. "Once we have had a chance to study the order and confer with the settling parties, we will have more to say about what it means and our next steps."
Exelon CEO Chris Crane told investors in a conference call this month that the company would abandon the merger if it's not approved by early March, which may run past the 14-day period set by the PSC.
But some analysts said that Exelon would end up accepting the conditions imposed by the PSC.
"At this point, Exelon has invested so much in this deal," said Karyl Leggio, a finance professor at Loyola University Maryland. "In Exelon's opinion, it's in the best interest of its shareholders. Every other commission in this deal that imposed additional conditions, Exelon agreed to it."
The conditions the D.C. commission imposed included keeping a $78 million package of benefits to D.C. ratepayers in escrow until it can be determined how best to spend it, and removing a requirement that the company develop microgrids in the District. It called including microgrids, essentially localized power sources serving a small area, premature.
The settlement backed by Bowser's administration included protections for ratepayers, job guarantees and investments in renewable energy.
D.C. PSC Chairman Betty Ann Kane voted against the decision to leave a path for the deal to go through. She said she thought having Pepco, a company that owns power lines and sells and delivers power to customers, under the ownership of Exelon, a company that also generates electricity, would be a conflict of interest.
"The return of Pepco to an ownership structure that includes energy generation, supply, marketing and sales will result in an entanglement of management, financial health and decision-making," Kane said.
But Commissioner Willie L. Phillips, who voted to approve the Bowser settlement, praised the parties who worked on the settlement.
They "worked to address deficiencies outlined by the [PSC's] initial order on the merger, and got most of the parties to agree to a settlement," he said. "However, today's decision has effectively moved the goal post in order to reject the settlement."
In Maryland, the Public Service Commission imposed conditions including a more lucrative package of benefits for Pepco and Delmarva ratepayers.
Exelon has argued that the merger's benefits will extend to BGE customers, including a faster response to power outages during storms and smaller rate increases than might occur otherwise.
The merger has faced fierce opposition from clean-energy advocates in Maryland and D.C., who argue that it will lead to rate increases and a lack of investment in renewable alternatives.
Maryland Attorney General Brian E. Frosh and consumer group Public Citizen signed on to a suit filed last year by the Office of People's Counsel, Maryland's consumer advocate, to require the Maryland PSC to reconsider its approval of the merger. The suit, filed in Queen Anne's County, is pending.
Paula M. Carmody, head of the People's Counsel office, said it was "up in the air" whether Exelon, Pepco and the parties that agreed to the initial settlement would agree to new terms.
"The District of Columbia may be concerned about the money being pulled out of their orbit," she said. "I suspect there may be more possible concern from some of the settling parties" than Exelon and Pepco.
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As the D.C. PSC announced its decision to reject the settlement, stock prices for both Exelon and Pepco plunged before rebounding after the commission voted to allow a path to settling the deal. Exelon's stock ended the day off about 0.8 percent at $31.73 a share, while Pepco shares were up 0.2 percent at $26.58 each.
On Friday, some opponents expressed disappointment and said they found the new conditions imposed by the D.C. PSC inadequate to address the fundamental problems they saw.
"Tens of thousands of residents, the majority of D.C.'s neighborhoods, and all of the substantive experts who looked at this merger agreed that it will lead to higher electricity rates and slower progress on clean, efficient energy," said Anya Schoolman, a leader of opponent group PowerDC Coalition. "In the end, we fear that the corrupting influence of corporate money on our elected officials won the day — again."
Mike Tidwell, director of the Chesapeake Climate Action Network, also decried the decision.
"If these wholly inadequate changes are agreed to, the result will be the same," he said. "While Mayor Bowser and Exelon lobbyists celebrate, D.C. residents will brace for big rate hikes and new roadblocks to clean energy."
The Associated Press contributed to this article.