Exelon, Pepco say settling parties must review provisions prescribed by District PSC regarding proposed merger

The Public Service Commission (PSC) of the District of Columbia’s Feb. 26 order to reject a nonunanimous settlement agreement, as filed, in the proposed Exelon (NYSE:EXC)/Pepco Holdings (NYSE:POM) merger prescribes new provisions that the companies and settling parties must carefully review to determine whether they are acceptable, Exelon and Pepco said in a Feb. 26 statement.

“Once we have had a chance to study the order and confer with the settling parties, we will have more to say about what it means and our next steps,” the companies added.

The PSC, in a separate Feb. 26 statement, said that it voted in a 2-1 decision to reject, as filed, the nonunanimous full settlement agreement and stipulation (NSA) concerning the proposed merger as not being in the public interest.

PSC Chairman Betty Ann Kane and PSC Commissioner Joanne Doddy Fort comprised the majority vote rejecting the NSA, with PSC Commissioner Willie Phillips dissenting, the PSC said.

As TransmissionHub reported, Kane, along with Fort and Phillips, in an Aug. 25, 2015, open meeting, voted in favor of a motion, which noted that the commission finds that the merger application, as filed, is not in the public interest and is denied. In a separate vote on a motion to approve the actual order that denies the application as filed, Kane and Fort voted in favor of adopting the order denying the application as filed, while Phillips voted against it; the order was approved by a vote of 2-1.

The District of Columbia Government, along with Exelon and Pepco Holdings, on Sept. 30, 2015, filed a joint motion with the PSC requesting that the PSC delay ruling on the companies’ earlier application for reconsideration while settlement talks take place. The companies, in their application, sought reconsideration of the PSC’s August 2015, ruling that their proposed merger is not in the public interest.

According to the PSC’s Feb. 26 opinion and order, the NSA, which was admitted on to the record of the case on Dec. 2, 2015, was submitted by Exelon; Exelon’s Exelon Energy Delivery Company; Pepco Holdings; Pepco Holdings’ Potomac Electric Power Company; New Special Purpose Entity LLC; the Office of People’s Counsel of the District of Columbia; Apartment and Office Building Association of Metropolitan Washington; the District of Columbia Government; the District of Columbia Water and Sewer Authority; the National Consumer Law Center; the National Housing Trust; and the National Housing Trust-Enterprise Preservation Corporation.

Exelon President and CEO Christopher Crane on Feb. 3 said during Exelon’s 4Q15 earnings call that the company’s primary goal in the utility business in 2016 is closing the merger with Pepco Holdings.

In a Feb. 19 statement about Pepco Holdings’ 4Q15 and full year 2015 financial results, Pepco Holdings Chairman, President and CEO Joseph Rigby said: “I am hopeful that the commission will provide this final approval required to close the merger. I remain convinced that joining the Exelon family of utilities will make Pepco Holdings a stronger company, both financially and operationally."

In that statement, Pepco Holdings said that its GAAP net income in 2015 from continuing operations was $318m, or $1.25 per share, as compared to $242m, or 96 cents per share in the prior year. Excluding items that the company said it believes are not representative of ongoing business operations, 2015 adjusted net income from continuing operations would have been $325m, or $1.28 per share, as compared to $321m, or $1.27 per share, in the prior year.

Pepco Holdings also said that its GAAP net income from continuing operations for the three months ended Dec. 31, 2015, was $121m, or 48 cents per share, as compared to $35m, or 14 cents per share, for the same quarter in the prior year. Excluding items that the company said it believes are not representative of ongoing business operations, adjusted net income from continuing operations for 4Q15 would have been $124m, or 49 cents per share, as compared to $59m, or 23 cents per share, in 4Q14.

Alternative terms proposed

The PSC, in its Feb. 26 statement, noted that Fort proposed alternative terms for a revised NSA that would, if accepted by the settling parties, result in the approval of the revised NSA and the merger application without additional action by the PSC, and asked for approval to send the alternative terms to the settling parties. The PSC noted that Phillips agreed to allow the alternative terms to be sent to the settling parties.

If all of the settling parties accept the revised NSA with the alternative terms, the revised settlement as amended is approved with no further action required by the PSC. Kane dissented, concluding that a revised NSA with the alternative terms would still not be in the public interest, the PSC added.

Thus, the PSC ruled by the 2-1 vote that if all settling parties accept the proposed conditions within 14 days from the order’s date, the revised NSA and the merger will be approved as in the public interest without further PSC action.

The PSC added that in initially determining whether the NSA is in the public interest, Kane and Fort agreed that there are four areas that warrant rejecting the NSA as filed:

  • The evidentiary record failed to provide a persuasive rationale for excluding non-residential ratepayers from sharing in the proposed $25.6m allocation of the Customer Investment Fund (CIF) for base rate credit relief and failed to persuade the PSC that the proposed allocation would not undermine the PSC’s ability to address the negative rate of return that currently exists for residential ratepayers and the resulting subsidies that are placed on non-residential customers
  • The NSA assigns roles to Exelon, as a developer of a 5 MW solar generation facility at the DC Water Blue Plains Treatment Plant, and to Pepco, as a developer of four public purpose microgrids, that undermine competition and grid neutrality and are inconsistent with the District’s restructured market
  • The proposed uses of the CIF for sustainability projects and Low Income Home Energy Assistance Program (LIHEAP) payments do not improve Pepco’s distribution system nor advance the PSC’s objective to modernize the District’s energy systems and distribution grid
  • The proposed method of allocating the CIF funds to District government agencies and designated funds deprives the PSC 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

The PSC said that Fort’s alternative terms resolve those four areas by:

  • Deferring a decision on the allocation of the $25.6m customer base rate credit until the next Pepco rate case
  • Removing the provision that designates Exelon as the developer of the facility at the Blue Plains plant and requiring Pepco’s commitment to facilitate the interconnection of a 5 MW solar project for any vendor selected by DC Water through its procurement process
  • Creating an escrow fund with two subaccounts at Pepco to hold $32.8m of the $72.8m CIF funded by Exelon under the NSA, about $21.6m of which is to be used for pilot projects emerging from Formal Case No. 1130, which involves modernizing the District’s energy system, and about $11.3m of which would be used for energy efficiency and energy conservation initiatives with a primary focus on housing, including multifamily buildings, for low- and limited-income District residents
  • Striking as premature the provisions regarding Pepco’s role with the District to develop public purpose microgrids and requiring Pepco to facilitate and support the pilot projects under Formal Case No. 1130

Commissioners’ opinions

In her concurring and dissenting opinion, included in the PSC’s opinion and order, Kane said that the fundamental flaw in the change of control of Pepco is not mitigated by the NSA. The basic structure of the proposed merger and the place of Pepco in the resulting holding company would remain essentially the same, she said, adding that in some ways, the proposals in the NSA would make the situation worse.

The NSA has provisions that would frustrate, undermine or directly contravene the requirements or intentions of the Retail Electric Competition and Consumer Protection Act of 1999, and the policy direction envisioned by the District’s Council for the provision of electric service to District residents, businesses and institutions, Kane said.

The inclusion of the CEO of Pepco as a member of the Exelon Executive Committee, for example, will obligate the Pepco CEO to make decisions on behalf of all of the parts of Exelon, and on behalf of Exelon shareholders, decisions in which the needs and interests of affiliates may conflict with or diverge from with the interests of Pepco as a distribution company, Kane said.

In her opinion, Fort said that looking at the revised NSA and the evidentiary record, she concludes that the revised NSA and the amended merger application, when taken as a whole, is now in the public interest. The revised NSA contains a more generous CIF in the amount of $72.8m, which will be used for a number of beneficial purposes including direct rate credits to residential customers, and funds to mitigate some of the immediate cost impacts of future rate increases that implement PSC policy to correct for negative class rates of return, she said.

If Exelon accepts the alternative terms of the revised NSA, it is committing to facilitate and support the pilot projects that the PSC will select under the Formal Case No. 1130 Pilot Project Fund that will set in motion a mechanism for beginning to modernize the city’s distribution system, Fort said.

Also, Exelon will become a more active participant in the development of solar and wind energy for the benefit of District ratepayers in a manner that is consistent with the regulatory structure, she said.

Fort further noted that by Exelon giving the Pepco CEO a seat at the Exelon Executive Committee table with the CEOs of the other distribution companies owned by Exelon ensures that the leader of the city’s distribution company will be able to participate in the forum where decisions impacting the District and local distribution company operations are being made.

In his dissenting opinion, Phillips said that in rejecting the initial merger, the majority explained why the merger was deficient and essentially laid out how the joint applicants could correct it, and yet, when the joint applicants worked to address those deficiencies, the majority effectively moved the goal post in order to reject the settlement.

He said that in his view, once the joint applicants submitted a settlement that corrected the deficiencies identified by the PSC, then the settlement should have been deemed in the public interest, absent a substantial reason to reject it.

Phillips said that while he reserves his judgment on the substance of the alternative terms proposed by Fort, he does not believe those terms alter his determination that the settlement agreement is in the public interest. The merger, he said, will provide substantial benefits to ratepayers in the District and region, helping to advance innovation, technology and the environment.

About Corina Rivera-Linares 3273 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 16 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.