Exelon must show regulators that Pepco merger is a good deal

Opponents and supporters of a proposed utility merger involving Exelon Corp., the parent of Baltimore Gas & Electric Co., began a calculated dance before Maryland regulators last week, with some hoping to sink the deal and others hoping to sweeten it.

While the chances that the Maryland Public Service Commission might reject the merger are slim — one expert said it's only happened twice in the last 30 years in about 70 utility mergers across the country — the regulators could impose conditions such as a larger bill credit for customers or a more significant investment in renewable energy.


There's also a chance Exelon and the company it's trying to acquire, Pepco Holdings Inc., could deem any conditions too burdensome and walk away from the deal.

Exelon must show regulators the takeover will result in "no harm" to customers — a legal requirement for approval. But critics aren't convinced, something Exelon officials blame on the complexity of their business.


"This is going to end up in rate increases for working families," said Delvone Michael, a member of Power DC, a collective of 28 environmental and other advocacy groups opposing the merger. "Just look what they did in Baltimore. They raised the rates four times, and we don't want to see the people in D.C. go through the same thing."

Exelon and Pepco officials said the larger company would have the financial power to make investments to improve Pepco's much-criticized reliability. Utilities are legally allowed to recoup some of the costs of those reliability upgrades in the form of rate hikes, but Exelon officials said combining forces would result in smaller rate hikes for both Pepco and BGE customers.

"It basically boils down to, we're going to provide better service for a lower cost," said Paul R. Bonney, a senior vice president and general counsel for Constellation, the BGE parent now under the umbrella of Exelon after a 2012 merger. "It won't completely forestall the need for increases, but it'll help ameliorate that."

Pepco Holdings, often referred to as PHI, consists of Pepco, which serves customers in Washington and its Maryland suburbs, Delmarva Power in the Delmarva Peninsula, and Atlantic City Electric in New Jersey. PHI's 2 million customers would swell Exelon's ratepayer rolls to about 10 million, making it one of the nation's largest energy companies.

Chicago-based Exelon struck the $6.9 billion deal to acquire PHI in April, and the proposal must be approved by various regulators. The Federal Energy Regulatory Commission and regulators in Virginia and New Jersey have approved the deal; hearings are continuing in Maryland, Delaware and the District of Columbia. The Maryland PSC, which began hearings last week that will continue almost every day this week until Friday, says it will make a decision by April 1. The merger is expected to be final around the middle of this year if approved by all regulators.

Exelon said it would provide $100 million in credits or other benefits to customers of Pepco's three utilities, which would be most visible in the form of a one-time bill credit of about $50 per customer.

Exelon also pledged $50 million in charitable donations over a decade and said it would honor collective bargaining agreements and avoid merger-related layoffs at the acquired companies for two years after the deal is approved. When Exelon bought BGE parent Constellation in 2012, it offered $100 bill credits to BGE customers.

Skeptics of the deal include not just the various advocacy organizations but the Maryland Office of People's Counsel, which called for it to be rejected. Maryland PSC staff proposed a higher bill credit as a condition of approval, and the Maryland Energy Administration's experts disputed Exelon's estimate that the merger would result in a massive benefit to the state's economy.


Christopher M. Crane, Exelon's president and CEO, said in a meeting with The Baltimore Sun's editorial board that some proposals advanced by skeptics in Maryland and D.C. could derail the merger if approved, including the requirement for a much larger bill credit.

Scott Hempling, an expert witness for the Office of People's Counsel and the former director of the National Regulatory Research Institute, said that the deal was tainted from the beginning when Joe Rigby, president of PHI, sought the highest bidder for his company.

"Mr. Rigby dialed for dollars — dollars for his shareholders, not for his customers," Hempling said in his testimony. "Having failed to dial for his customers, neither he nor his board could have known what other bidders might have offered."

Still, Hempling said only twice since the mid-1980s have any state commissions rejected a utility merger. The Federal Energy Regulatory Commission, which has signed off on the merger, has never rejected a merger, Hempling said.

A handful of times, utilities seeking to merge have deemed conditions set by state commissions too stringent and walked away, including during a proposed merger of BGE and Pepco in 1997.

Some proponents of the deal said the promised improvements in Pepco's reliability "strengthens the hand" of those trying to lure businesses to Maryland.


"The thing that businesses like least is unpredictability," said Brien Poffenberger, president of the Maryland Chamber of Commerce. The merger "lends level of stability to businesses that might be thinking about expanding or moving to Maryland."

Power DC's Michael said that "of course" Pepco needed to improve it's well-publicized reliability problems, but he didn't think the merger was the way to fix it.

"These guys stand to make a bundle off of this," he said. "Us paying a little more is the last thing they're concerned about."

Critics also argue that Exelon, the largest owner of nuclear generation in the country, is opposed to advancing renewable energy. Exelon announced last year that it would close several unprofitable nuclear plants in Illinois and New York but is now negotiating with those state governments to keep them open. Some critics worry the financial troubles with the aging nuclear plants could result in rate hikes elsewhere.

Exelon has proposed regulations that would keep aspects of its business other than providing utilities to customers — like the nuclear plants — separate from rate hikes. Some said that as long as regulators are paying attention, it shouldn't be an issue.

"It's the [Public Service] Commission's job to make sure financial troubles on one side don't splash over," said Benjamin F. Hobbs, a Johns Hopkins University professor who studies energy policy. "So in theory, there shouldn't be any problem, and, if the state commission does its job, it shouldn't matter in the least bit."

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As for criticisms that Exelon is opposed to renewable energy, Constellation's Bonney cited investments in solar energy required by Maryland in the wake of the Constellation merger and said the company was interested in helping communities develop small-scale, alternative generation.

Eric D. Wachsman, director of the University of Maryland Energy Research Center, said he thought the deal had "significant advantages," mostly related to Exelon being a much larger company than Pepco. Exelon has larger capital reserves to invest in improving reliability, and could mobilize squads of workers to deal with the fallout of a major storm and get the lights back on faster, he said.

Wachsman said he thought opponents ought to focus on pressuring Exelon to build microgrids — basically miniature versions of the electrical grid where customers can use more renewable energy. A task force convened by the state last year endorsed microgrids and proposed solutions to establish them.

He thought opponents ought to focus less on demanding an increase in the bill credit, as they did during the Constellation-Exelon merger.

"Did anybody notice it?" Wachsman asked of the $100 bill credit given to BGE customers during the Exelon-Constellation merger. "I mean, some people need it but the vast majority of ratepayers probably didn't need it. If that investment went into making the grid greener, then it would be better than a giveaway so everybody felt like they got something."

An earlier version of this story incorrectly attributed an opinion to Scott Hempling, the expert witness for the Office of People's Counsel. Hempling did not express an opinion on whether or not the merger would be approved.