Dive Brief:

• The District of Columbia Public Service Commission (D.C. PSC) unanimously rejected the proposed acquisition of Pepco Holdings by Exelon Corporation this morning, halting the merger that would have created America's largest electric utility at its final hurdle.
• Four states — Maryland, Delaware, New Jersey and Virginia — and the Federal Energy Regulatory Commission (FERC) approved the acquisition in the past year, leaving D.C. as the last jurisdiction to weigh in. Both Maryland and Delaware added dozens of conditions to the merger in their approvals.
• The PSC ruled that while the merger presented some tangible benefits to D.C. residents, those were outweighed by concerns about regulating a larger and "more complex" utility based outside the District, and an "inherent conflict of interest" between the utility's generation portfolio and the District's pursuit of a cleaner energy future.

Dive Insight:

Nowhere else in Pepco's service area was Exelon's proposed acquisition more contested than in the nation's capital — and that fact was not lost on the District's utility regulators as they prepared to release their decision on Tuesday morning. 

Calling it "one of the most significant decisions the commission will ever make," PSC chair Betty Ann Kane reminded the public that "a rate case lasts only until the next rate case. This decision is forever."

The PSC based its decision on seven factors, including the merger's impact on the financial health of the district, utility management, public safety, risks from operations outside D.C., competition in retail and wholesale markets, conservation and environmental goals, and the PSC's ability to regulate the new utility. Under those parameters, Kane said that the PSC found that "the impact of the proposed merger is a mixed one."

Among the tangible benefits were the buyout of Pepco shareholders and a $33.75 million customer investment fund, she said. There were a number of impacts the PSC considered neutral, Kane continued, including reliability improvements at a capped cost promised by Exelon. While the Chicago-based utility made reliability one of the merger's biggest selling points, the PSC found that its promises relied on a power line undergrounding initiative that Pepco started before the acquisition was announced.

But those positive and neutral aspects were outweighed by the potential negative impacts of the merger, according to the PSC's opinion. In particular, Kane told the mostly anti-merger crowd at the commission meeting that the more complex structure of Exelon's ownership would "negatively impact the commission's ability to regulate" the utility, and that in a time of dramatic change in the energy sector, Pepco's "ability to adapt will be constrained by an increased management bureaucracy."

Perhaps most significantly, the PSC wrote in a summary of its order that Exelon's vertically-integrated structure and its large generation fleet, with many old and unprofitable nuclear plants, could seriously inhibit the District's environmental goals.

"We are also concerned about the inherent conflict of interest that might inhibit our local distribution company from moving forward to embrace a cleaner and greener environment," reads the PSC summary of the decision, echoing one of the central points that merger opponents laid out to Utility Dive back in January.

The PSC rejected the merger unanimously, but approved the specific order rejecting the merger by a vote of 2-1. Commissioner Willie L. Phillips said that he would have preferred if the PSC laid out more options for the companies to revise their application, and indicated he would write a dissent to the order while still voting to reject the merger as it stands.

Going forward, Exelon and Pepco can petition the PSC for a rehearing on the merger. If that's denied, they could appeal to the courts, arguing either that the regulators did not make an adequate decision based on the facts in the case, or that they did not follow the law or their own precedent in the decisionmaking process. Throughout that entire process, utility regulatory expert Karl Rabago said in a phone conversation, the two companies may negotiate a settlement with regulators.

D.C. has been home to the most significant opposition to the proposed merger since it was proposed last year. Nearly half of D.C. neighborhood governments have announced their opposition to the deal, along with 4 of 13 D.C. Councilmembers. Not one neighborhood commission or councilmember expressed public support for the deal.

A summary of the PSC's decision is available online; the full decision will be released by close of business on August 26.