On March 23, 2016, the Public Service Commission of the District of Columbia (“DCPSC”) issued an order approving the proposed $6.8 billion merger between Exelon Corporation (“Exelon”) and Pepco Holdings, Inc. (“Pepco” and together with Exelon, “Joint Applicants”). The DCPSC 2-1 vote approving the merger follows two previous orders in which the DCPSC denied the proposed merger on grounds that it was not in the public interest (see March 8, 2016, edition of the WER). Upon consummation of the merger, Exelon will become the largest electric utility in the United States by customer base.
On June 18, 2014, the Joint Applicants filed their initial merger application, which the DCPSC denied on August 27, 2015. Following that order, the District of Columbia (“D.C.”) government and the Joint Applicants negotiated a proposed settlement (“Settlement”) by which D.C. Mayor Muriel Bowser’s administration would endorse the merger proposal and recommend approval by the DCPSC. The Joint Applicants filed the Settlement along with a motion to reopen the record on October 6, 2015 (see October 12, 2016, edition of the WER). Under the terms of the Settlement, Exelon’s original investment in D.C., which included funding a Customer Investment Fund (“CIF”) and investing in renewable generation facilities, increased from $14 million to $78 million. On February 26, 2016, the DCPSC rejected the Settlement in a 2-1 vote, finding that:
- the record failed to provide a persuasive rationale for excluding non-residential ratepayers from sharing in a proposed $25.6 million allocation of the CIF for customer base rate credit relief;
- the Settlement assigned roles to the Joint Applicants that would undermine competition and grid neutrality;
- the proposed uses of the CIF for sustainability projects and the Low-Income Home Energy Assistance Program would not improve Pepco’s distribution system nor advance the DCPSC’s objective to modernize D.C.’s energy systems and distribution grid; and
- the Settlement’s proposed method of allocating the CIF funds to D.C. agencies would deprive the DCPSC of the ability to enforce compliance with the terms of the Settlement and to ensure that all of the funds would be used to further the objectives of enhancing the distribution system and benefiting D.C. ratepayers.
In addition to rejecting the Settlement, DCPSC Commissioner Joanne Doddy Fort proposed revisions to the Settlement which she believed would mitigate its shortcomings and render it consistent with the public interest.
On March 7, 2016, the Joint Applicants filed, this time without the support of the D.C. government, revised terms and conditions of the merger. In the request, the Joint Applicants presented three options for the DCPSC: (1) adopt the Settlement under its original terms; (2) adopt the revised Settlement (“Option 2”) proposed by Commissioner Fort in the February 26, 2016 order; or (3) adopt the terms of Option 2 with a further-revised CIF allocation to preserve the benefits of the residential customer base rate credit.
In its 2-1 decision approving the merger, the DCPSC found that only Option 2 is in the public interest. Under Option 2, the DCPSC will receive and deposit $72.8 million in Joint Applicant contributions in the CIF, set aside $11.25 million for energy efficiency and conservation programs for low-income residents, and use $21.55 million for pilot projects such as updating the city’s electric distribution grid. Additionally, the Joint Applicants will provide for an incremental offset of up to $1 million per year as a regulatory asset (with a 5 percent return) that could be used along with the rate base credit to further delay increases for ratepayers. Finally, Exelon will be required to invest in 7 MW of new solar in D.C. and 100 MW of new wind resources in the PJM Interconnection, L.L.C. region. In the order, the DCPSC found that “[t]hese are all funds that will not be available to District ratepayers or the District if the [m]erger is not approved.”
The DCPSC’s decision marks the final hurdle for the Joint Applicants to complete the merger, which was previously approved by FERC, the Department of Justice, and the states of Maryland, Delaware, and New Jersey. According to statements released by the Joint Applicants, the necessary paperwork to complete the merger has already been finalized and filed.
The DCPSC order is available here.