Public service commission approves Exelon-Pepco merger on 3-2 vote

LAUREL, MD -- Power lines near a BGE substation in southeastern Howard County. Staff photo/Doug Kapustin

Despite continuing opposition from critics that include Maryland's attorney general, state regulators approved a $6.9 billion merger between Baltimore Gas and Electric parent Exelon Corp. and Pepco Holdings in a split vote Friday.

In applying for the merger, Exelon argued the deal would bring a host of benefits to both Pepco and BGE customers, including a faster response to power outages during storms and smaller rate hikes than might occur otherwise. Critics worry, however, that consolidating the state's largest electric utilities under Exelon would lead to bigger rate hikes.


Maryland Attorney General Brian E. Frosh, who strongly opposed the merger on behalf of the Maryland Energy Administration, said he was "exploring all options" to protect the state's consumers after the decision, not ruling out a lawsuit to block it.

"Today is a bad day for consumers, and a great day for monopolies," Frosh said in a statement. "This merger — which the PSC approved by the slimmest of margins — would create a company controlling service to 80 percent of Maryland's electric consumers, with the incentive and ability to stifle competition and suppress innovation. The harms to customers under this arrangement are obvious and substantial."


In approving the deal, the Maryland Public Service Commission imposed 46 conditions, including higher reliability standards and a $100 rate credit for Delmarva and Pepco residential customers — twice what the companies offered. It also ordered them to spend $43.2 million for energy-efficiency programs in Prince George's and Montgomery counties and in Delmarva's Maryland service area.

Exelon initially proposed a customer investment fund of $40 million for Maryland customers, then upped it to $94.4 million after opposition began to emerge. Under the PSC order, the company would spend about $127 million on Maryland customers.

Two of the five commissioners, Harold D. Williams and Anne E. Hoskins, voted against the deal.

The merger, which still needs approval by Washington, D.C., regulators, would make Exelon one of the nation's largest utility companies. A decision there isn't expected until this summer.

Exelon and Pepco officials issued a joint statement saying the companies were "pleased" with the decision but needed more time to study its conditions. They have until May 26 to accept or reject the PSC's conditions.

"Our proposal delivers significant economic benefits to Maryland customers, increases reliability, promotes energy efficiency and advances clean energy as part of a long-term commitment to improve service and modernize our grid," the statement said. "We will have more to say once we have time to study the order."

Chicago-based Exelon proposed the merger with Pepco Holdings last April; Pepco Holdings owns three electric and gas utilities — Pepco, Atlantic City Electric and Delmarva Power. Pepco serves customers in the District and its Maryland suburbs.

Under state law, the PSC was allowed to approve the merger only if it resulted in "no harm" to consumers and was in the public interest. Critics, including Frosh and the Maryland Energy Administration, said the merger met neither obligation and urged the PSC to reject it.


Even the PSC's staff recommended the merger be approved only if the company spent significantly more on bill credits and other benefits for its customers. A consulting firm hired by the PSC staff argued that Exelon's estimate of economic benefits to Maryland did not take into account job losses that could cost the state between $41 million and $309.4 million in economic impact.

A host of advocacy groups also loudly opposed the merger. They argued it would result in a loss of "across the fence" competition, in which utility companies are compelled to improve services when there is a better-performing neighbor nearby. They also worried about the implications of ownership by a massive, out-of-state company that was having profitability issues with some of its nuclear power plants.

Critics argued that Exelon would raise utility rates on Pepco customers, pointing to two hikes in recent years on BGE ratepayers since the company bought BGE parent Constellation in 2012. Exelon said the merger would result in smaller rate hikes for Pepco and BGE customers in the future because of cost savings associated with the merger.

Williams and Hoskins echoed the critics' concerns in their written dissent.

The merger, they wrote, "will undermine competition; it will increase rates, challenging affordability for many consumers; and it will eviscerate economic protections due to a weakened and compromised corporate governance structure."

They noted that $1 billion in proposed reliability upgrades will be borne mostly by customers in the form of rate hikes, and said they thought the merger would benefit Exelon and Pepco's shareholders more than ratepayers.


Some early critics of the deal said they were stunned by the PSC's decision, given the amount of opposition and what they saw as a lack of benefits.

Mike Tidwell, director of the Chesapeake Climate Action Network, found the decision "shocking," "baffling" and "incomprehensible." His group argued Exelon was opposed to the expansion of renewable energy.

"This decision and the commissioners that voted for it will be long remembered in the sharpest negative light for a decision that will bring almost certain harm to ratepayers and the environment for years to come," he said.

Paula M. Carmody, head of the consumer advocate Maryland Office of People's Counsel, said she and her staff were "very disappointed" in the decision.

It is rare for a public service commission to reject such a merger. It has only happened twice in the past 30 years in about 70 utility mergers across the country, according to Scott Hempling, an expert witness for the Office of People's Counsel and the former director of the National Regulatory Research Institute. In a few cases, 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.


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Some conditions imposed on the merger

• $66 million for residential rate credits, a $100 bill credit per customer.

•$43.2 million for energy efficiency initiatives, 20 percent of that for limited-income programs

•$14.4 million in Green Sustainability Funds for Prince George's and Montgomery Counties

•$4 million for sustainable energy workforce development programs

•Exelon must provide for the construction of 20 megawatts of renewable energy generation, 10 megawatts each in the Delmarva and Pepco service territories


Source: Maryland Public Service Commission