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Grassroots pressure has put a stop to the proposed Exelon-Pepco merger in DC

David vs. Goliath fight sees temporary victory for David.

Hey, DC, do you mind covering for these? We'll get next.
Hey, DC, do you mind covering for these? We'll get next.
(Photo by Scott Olson/Getty Images)

On Tuesday, the Washington, DC, public service commission (PSC) unanimously rejected a bid by giant utility holding company Exelon to acquire Pepco, the utility that provides electricity services to DC residents.

Boring as it sounds, it's actually a pretty big deal. As the PSC writes in its summary decision, "This proceeding has generated more interest and more active participation by parties and interested persons than any other proceeding in the Commission’s more than a century of operations." It is considerably more important than most PSC decisions, as it could have permanently altered the ownership and control of DC's utility. So this ruling has been hotly anticipated and will reverberate far beyond DC.

(Note: Exelon and Pepco can still ask for a re-hearing from the PSC. Failing that, they can appeal to courts. And at any time they could theoretically negotiate some sort of settlement with the PSC that satisfies its concerns. So this isn't over yet. But this decision is an unexpected victory for grassroots activists.)

Exelon wants to eat Pepco because it needs more ratepayers to pay for its nuclear plants

I wrote about the proposed Exelon-Pepco merger in some detail here; you should read that if you want the gory details. For now let's just review the basic background.

Exelon is an extremely large utility holding company, which means it's a parent company that owns a whole bunch of utilities. Some of those are generation utilities, which own power plants and sell power on wholesale energy markets, and some of them are distribution utilities, which manage local grids and deliver power to customers. In "restructured" areas like the ones where Exelon operates — about half the country — it's no longer legal for a single utility to be "vertically integrated," i.e., to own both generation and distribution. But it is legal for a utility holding company to own both kinds of utilities, as long as they (wink, wink) keep them walled off from one another.

Anyway, Exelon, like many utility holding companies, is hurting.

Not long ago, utility holding companies were buying up generation utilities by the bushel, stocking up on big coal and nuclear power plants. That's where the profits were: on wholesale power markets.

But then those power markets got all, y'know, competitive. Smaller natural gas plants and wind farms got cheaper and started badly undercutting the profits of those big coal and nuke plants. Suddenly those same utility companies faced declining and unpredictable revenue.

What to do? In response, utility holding companies have been stampeding in the other direction, buying up more distribution utilities. You see, the revenue from distribution utilities tends to be smaller, but they are fully regulated (none of this nasty "competing in markets" business), so their profits are guaranteed and extremely predictable.

As a bonus, a utility holding company that buys a distribution utility suddenly has a whole new set of captive ratepayers. It's not supposed to exploit those ratepayers to force them to help it pay off its threatened coal and nuclear assets, but that rule is, as they say, honored in the breach.

And that more or less describes Exelon's situation. Some 63 percent of its revenues are from generation utilities, and 81 percent of its generation output is nuclear. Those nuclear plants are currently getting their asses kicked on wholesale markets.

So Exelon wants to eat Pepco, which owns three distribution utilities. It wants two things out of the deal. First, it wants steadier, more predictable revenue streams. And second, it wants new, captive ratepayers to help pay off the enormous cost of its nuclear plants.

Sounds great for Exelon. And for Pepco shareholders. But not so great for Pepco ratepayers.

DC regulators have decided the risks of the merger outweigh the benefits

As part of the proposal, Exelon dangled all sorts of carrots. To quote myself:

[Exelon] has promised to keep employment at Pepco at least steady for two years, but it’s promised nothing after that. It has made commitments regarding reliability, but less than what D.C. law already requires. It has offered a "Customer Investment Fund" — i.e., a payoff to Pepco ratepayers — that would amount to a one-time bill credit of about $53 per customer (small beans relative to the bounty awaiting Pepco shareholders), but that’s unlikely to offset long-term rate increases.

And finally, it has promised to "ring fence" Pepco, which would allegedly protect the smaller company from any raid on its resources by the Exelon parent company. According to [a report from independent analysts at] IEEFA, "no independent assessment of the ring fencing provisions has been made and no opinion by an independent party offered as to their integrity and ability to handle a hostile attack." Plus the ring-fence provisions wouldn’t protect Pepco ratepayers from rate hikes, which, remember, Exelon has conspicuously not promised to avoid.

The DC PSC acknowledged that there were some real benefits to the merger. Some of the other promised benefits, it said, were "neutral" at best (like the reliability promise, which trades on a reliability program that Pepco has already joined).

But ultimately the PSC judged that those benefits are outweighed by the risks. They are:

  1. Exelon is likely to raise Pepco rates to help cover the high costs of its nuclear fleet.
  2. Pepco will be a tiny little part of Exelon, unable to exert much influence over the company's decisions. (In other words, DC loses lots of autonomy and control over its energy future.)
  3. Relatedly, Exelon is unlikely to care much about, or devote many resources to, DC's ambitious targets for clean energy.

I have more on all these risks in this post, but I'll just quote myself about the third one:

D.C. has big green plans. It has a renewable energy standard targeting 20 percent renewables by 2020, with 2.4 percent solar by 2023 (which would involve a huge expansion of rooftop solar). The city’s official Sustainable D.C. plan calls for 50 percent renewable energy, a 50 percent decline in energy use, and a five-fold expansion of green jobs by 2032. All those are stretch goals that will involve coordinated effort for decades.

Exelon, meanwhile, is among the worst utilities on sustainability. It opposes net metering for solar, opposes the federal tax credit for wind (which, remember, competes against its nuclear fleet), opposes various clean-energy initiatives in the Maryland state legislature, and supports guarantees and subsidies for its nuclear plants. Renewable energy reduces wholesale power prices and Exelon needs wholesale power prices to stay high to keep its nukes in business. That’s a fundamental tension that won’t go away, even if Exelon supports a few token renewable projects.

So the battle lines here were pretty clear. On one side were Exelon executives and Pepco shareholders, who stood to make out like bandits. On the other side were DC ratepayers and the district's clean energy goals, which stood to get the short end of the stick.

Virginia, Delaware, Maryland, and New Jersey had already approved the merger, as had the Federal Energy Regulatory Commission (FERC). The DC PSC was the last line of defense, and there was an extraordinary upsurge in grassroots organizing and opposition in DC over the past several months aimed at swaying its decision.

While the fight is not over, this decision is an unexpected victory for those activists.