Renewed opposition to Exelon-Pepco merger threatens to scuttle deal

New opposition casts doubt on merger of utility giants Exelon and Pepco

Key stakeholders in Washington, D.C., including the mayor, withdrew support Tuesday from the proposed merger of the parent company of Baltimore Gas and Electric Co. and Pepco Holdings, threatening to scuttle the deal for good.

The $6.9 billion merger of BGE parent Exelon with Pepco, which serves Washington and its Maryland suburbs as well as the Eastern Shore and southern New Jersey, needed only the approval of regulators in D.C. to go forward. It had already been approved by other federal and state regulators, including the Maryland Public Service Commission last spring.

D.C. Mayor Muriel Bowser announced Tuesday that she could no longer support the merger after the Public Service Commission of the District of Columbia last week rejected a plan negotiated by her office. That deal called for the utilities to pay the District $78 million for its support, including $26 million to offset rate increases for residents over the next four years.

But the D.C. PSC found fault with that proposal, calling for the $78 million to be kept in escrow while it determined how best to spend it and stripping out rate protections and a requirement that the utilities build microgrids.

Analysts expected the utilities to embrace the proposal but wondered if the other stakeholders would be willing to accept it. Some of them weren't.

"The PSC's counterproposal guts much-needed protections against rate increases for D.C. residents and assistance for low-income D.C. ratepayers," Bowser said in a statement Tuesday. "That is not a deal that I can support."

Sandra Mattavous-Frye, the chief advocate for D.C. ratepayers, also said she cannot support the revised merger. She is among nine people who must sign off for the agreement to clear a final regulatory hurdle.

"The Commission's order eviscerates the benefits and protections essential to render the proposed merger in the public interest," she said in a statement Tuesday. "I am hopeful all parties and consumer participants to this case will not lose sight of the real issue in this case — the protection of our most vulnerable residents."

The parties are back in negotiations attempting to salvage the merger.

Discussions are "very fluid right now," said Exelon spokesman Paul Elsberg.

"We continue to have conversations with the D.C. government and other settling parties," he said in a statement. "We will provide an update at the appropriate time."

In a conference call last month, Exelon CEO Chris Crane told investors the company would abandon the merger if it's not approved by early March. Similarly, the D.C. PSC gave the utilities and other stakeholders 14 days to decide whether to accept the revised deal after its decision last week.

The opposition appears to pose a real threat to the deal being consummated, said Karyl Leggio, a finance professor at Loyola University Maryland.

"This is significant," Leggio said. "I think it's going to be very difficult to get this merger completed."

Pepco's stock plunged 13 percent Tuesday to close at $22.81 a share.

Opponents, including the consumer advocacy group Public Citizen, were cautiously celebrating Tuesday, saying the possibility seemed increasingly dim the merger could hold together.

"After a little more than a year, it is still clear that no amount of fiscal sweeteners, backroom deals or pro-Exelon television ads could distract from the obvious threats to consumer finances and the environment," Allison Fisher, a Public Citizen spokeswoman, said in a statement.

Anya Schoolman, director of DC Solar United Neighborhoods, which opposes the merger, said Mattavous-Frye's decision to walk away sends the talks into uncharted territory.

"The discussions that are happening now are what usually happen before the commission is asked to approve a deal, not after," she said.

Because of its size, the proposed merger could transform the country's utility landscape. The deal's ups and downs during nearly two years have been closely watched by environmentalists, utility and public-service attorneys, and financial analysts across the country.

The debate over the merger centered on the role of renewable energy sources like wind and solar against legacy technologies, such as nuclear power, natural gas and coal. Many environmental groups opposed the deal because they believed it would hinder the advance of renewable energies, while arguing it would lead to rate increases to support Exelon's aging fleet of nuclear reactors.

Mike Tidwell, director of the Chesapeake Climate Action Network, said opposition from Bowser and Mattavous-Frye spoke volumes "of just how bad an idea this is."

"I hope this will be a final decision of 'no,'" he said.

Exelon has argued that the merger's benefits would extend to BGE customers, including a faster response to outages during storms and smaller rate increases than might occur otherwise. Exelon has owned BGE since its 2012 merger with Constellation Energy.

While the Maryland PSC approved the merger in a 3-2 vote in May, the Office of People's Counsel, Maryland's consumer advocate, and the Sierra Club and Chesapeake Climate Action Network separately asked the state courts to require the Maryland PSC to reconsider its approval of the merger. The suit, initially rejected by a judge in Queen Anne's County, has been appealed to the state's Court of Special Appeals.

This story has been updated to reflect better detail about the status of appeal of the Maryland PSC's decision by the Office of the People's Counsel.

The Associated Press contributed to this article.

tprudente@baltsun.com

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