Dive Brief:

• The District of Columbia Public Service Commission denied approval to Exelon's acquisition of Pepco Holdings in a 2-1 vote this morning, but also established new terms to the deal that would result in approval if the companies accept them.
• In their vote, Commissioners Betty Ann Kane and Joanne Dotty Ford rejected the settlement on four grounds, including concerns that the deal would not enhance Pepco's distribution system reliability and that the companies' roles in developing solar and microgrid projects could "undermine competition and grid neutrality." Commissioner Willie Phillips dissented, saying the settlement was in the public interest.
• In a separate 2-1 vote, the commission outlined a series of changes to the settlement deal that, if adopted by the parties, would result in merger approval. Pepco and Exelon have 14 days to decide on the revised conditions of the deal. If they accept the conditions, the merger will close.

​​Dive Insight:

After nearly two years of hearings up and down the mid-Atlantic states, power sector observers expected the Exelon-Pepco merger to reach its conclusion today. DC regulators had other thoughts. 

The District of Columbia Public Service Commission on Friday rejected the merger agreement, saying the settlement was not in the public interest. The news comes after the PSC rejected an initial merger package last August, citing an "inherent conflict of interest" between Exelon's business model and the District's clean energy goals. The company struck a settlement deal with D.C. Mayor Muriel Bowser and a group of critical merger stakeholders soon after, promising greater investment in the city and temporary rate freezes for residential customers.

During the meeting, Commission Chair Betty Ann Kane outlined four areas that warranted rejection of the NSA:

• The companies failed to provide a persuasive rationale for excluding non-residential ratepayers from a $25.6 million allocation to a customer investment fund (CIF) meant for rate relief.

• Provisions in the NSA that allow Exelon to develop a solar facility and Pepco to construct four microgrids “undermine competition and grid neutrality and are inconsistent with the District’s restructured market.”                

• Proposed uses of the CIF for sustainability projects and Low Income Home Energy Assistance Program (LIHEAP) payments not improve Pepco’s distribution system nor advance the Commission’s objective to modernize the District’s energy systems and distribution grid.”

• The proposal in the NSA to allocate the CIF funds to D.C. government agencies “deprives the Commission of the ability to ensure that all of the funds are being used to enhance the distribution system and benefit District ratepayers, and to enforce the terms of the NSA.”

While the commissioners rejected the settlement agreement as proposed, they suggested a series of fixes that, if adopted by the settlement parties, would result in merger approval:

• Allocation of the $25.6 million for rate relief in the CIF would be deferred until Pepco’s next rate case.

• The provision that designates Exelon as the developer for the D.C. Water solar facility would be eliminated, and Pepco would commit to interconnect any facility the water treatment agency installed through its own procurement process.

• The companies would create an escrow fund with two sub accounts to hold $32.8 million of the $72.8 CIF promised by Exelon. One account would put $21.55 million toward innovative pilot projects for the distribution grid; the other would contribute $11.25 million for energy efficiency and conservation initiatives focused on multi-family housing and low and limited income residents.

• Provisions regarding Pepco’s role in developing public purpose microgrids would be eliminated as premature.

Exelon and Pepco now have 14 days to decide on the revised conditions for the deal. If they accept, the merger will close.

The Pepco deal would create the largest electric utility in America by the size of its customer base, operating almost entirely in a single wholesale market, the PJM Interconnection.

The size of the combined company worried District commissioners when they rejected the initial merger proposal, citing concerns about their own ability to regulate such a large company, along with other factors like the financial health of Exelon's nuclear plant fleet, which is the largest in the nation. 

After that rejection, Exelon quickly hammered out a deal with Mayor Bowser's office and a group of merger opponents, hoping to sway regulators for approval on appeal. In October, Utility Dive was the first to break the news that the company had reached a settlement with the mayor's office, including raising its financial commitment to District ratepayers from $14 million to $78 million. 

The stakes in the merger proceeding are high for Exelon, which is seeking the predictable income of Pepco's utility business to hedge against risks presented by its fleet of older nuclear plants, many of which are unprofitable or on the verge of it in PJM markets.