FERC okays Exelon takeover of Pepco Holdings

The Federal Energy Regulatory Commission on Nov. 20 approved the takeover by Exelon Corp. (NYSE: EXC), which has a lot of generation, of Pepco Holdings (NYSE: POM), which has little in the way of power generating capacity.

On May 30, Exelon and Pepco Holdings, together with their respective subsidiaries that are public utilities subject to the jurisdiction of the commission, filed an application requesting that the commission approve a merger and disposition of assets by which Exelon would acquire Pepco Holdings (PHI).

Exelon is a public utility holding company that, through its utility subsidiaries, distributes electricity to approximately 6.6 million customers in Illinois, Pennsylvania, and Maryland, and also distributes natural gas to approximately 1.15 million customers in the Philadelphia and Baltimore areas.  Exelon has a diverse portfolio of electric generation capacity, and operates the largest nuclear fleet in the United States. Exelon operates through its principal subsidiaries, Exelon Energy Delivery Co. and Exelon Generation Co. LLC. Exelon Delivery owns Exelon’s three franchised public utilities: Commonwealth Edison, PECO Energy and Baltimore Gas & Electric. Exelon Generation owns Exelon’s fleet of electric generation facilities.

Pepco Holdings, through its regulated public utility subsidiaries, is engaged primarily in the transmission, distribution and default supply of electricity, and, to a lesser extent, the distribution and supply of natural gas at retail. In addition to its regulated utility operations, Pepco Holdings, through Pepco Energy Services Inc. and its subsidiaries, engages in certain non-utility activities. Pepco Holdings’ three regulated public utilities – Potomac Electric Power, Delmarva Power & Light and Atlantic City Electric – have each previously divested their generation facilities. The three utilities do not purchase power except pursuant to requirements contracts to serve their default service load and under must-take contracts from Qualifying Facilities under the Public Utility Regulatory Policies Act of 1978, and under contracts for wind power to satisfy renewable portfolio standard requirements in Delaware.

With respect to transmission service, the applicants stated that Pepco, Delmarva, and Atlantic City Electric are all members of PJM Interconnection.

Exelon will acquire Pepco Holdings in an all-cash transaction whereby Exelon will pay $27.25 per share for each outstanding share of common stock of Pepco Holdings. Pepco Holdings will become a wholly-owned subsidiary of Exelon. Pepco Holdings’ regulated public utilities will be placed under Exelon Delivery along with Exelon’s other regulated public utilities. Pepco Holdings’ unregulated subsidiaries will be placed in separate branches of the Exelon holding company structure.

Pepco only controls a minor amount of landfill-gas-fired generation

Pepco Holdings owns or controls only 17 MW of landfill-gas-fired, net-metered, and behind-the-meter generation in PJM, all of which is located in the AP South submarket of PJM, and 15 MW of which is located in the 5004/5005 submarket. Applicants state that the generation capacity represents approximately 0.02 percent of the total installed capacity in each market. Applicants performed a simplified “2ab” Herfindahl-Hirschman Index (HHI) calculation. Applicants state that the change in HHI in each market was less than one HHI point.

Applicants also analyzed certain Pepco Holdings power purchase contracts with generators that are Qualifying Facilities under the Public Utility Regulatory Policies Act of 1978, as well as with owners of wind generation projects. They said that, in each case, Pepco Holdings does not control the output of the plant. Further, the applicants stated that all revenues received by Pepco Holdings from the sale of energy into the PJM energy markets are returned to its retail customers. Consequently, they asserted that the contracts are not attributable to Pepco Holdings for market power purposes.

Applicants note that, in the PJM capacity market, Pepco Holdings bids demand response resources, pursuant to state mandated programs, into the PJM Reliability Pricing Model auctions. Applicants state that Pepco Holdings’ 700 MW of demand resources offered into the 2017/2018 Base Residual Auction represented less than 0.5% of the PJM market. Applicants state that, when combined with Exelon’s 26,000 MW of generation, demand response and energy efficiency resources in PJM, the merged company will control about 14.1% of the total market capacity. Accordingly, they concluded that the merger does not raise any concerns with respect to the PJM capacity markets.

“We are pleased that FERC has approved our merger with PHI,” said Chris Crane, Exelon president and CEO, in a Nov. 21 statement. “FERC’s approval is another step forward toward completing this transaction.”

“This approval is further momentum toward uniting our two companies,” said Joseph M. Rigby, PHI chairman, president and CEO. “Together, we will bring substantial benefits to our customers and the communities we serve.”

The companies have already made transaction-related filings with the Delaware Public Service Commission, Public Service Commission of the District of Columbia, New Jersey Board of Public Utilities and Maryland Public Service Commission. The transaction is also subject to the notification and reporting requirements under the Hart-Scott-Rodino Act and other customary closing conditions.

The transaction was approved by the Virginia State Corporation Commission in October and by PHI stockholders in September. The companies anticipate completing the merger in the second or third quarter of 2015.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.