Following the approval of their proposed merger by District of Columbia regulators earlier on March 23, Exelon (NYSE:EXC) and Pepco Holdings (NYSE:POM) announced later the same day that they have completed their merger transaction.
The merger brings together Exelon’s three electric and gas utilities – Baltimore Gas and Electric (BGE), Commonwealth Edison (ComEd) and PECO – and Pepco Holdings’ three electric and gas utilities – Potomac Electric Power Company (Pepco), Delmarva Power and Atlantic City Electric. Atlantic City Electric, Delmarva Power and Pepco will remain as separate companies and retain their local headquarters in Mays Landing, N.J., Newark, Del., and Washington, D.C., respectively. Together with Exelon’s other three utilities, they serve about 10 million customers across six jurisdictions, the statement added.
Christopher Crane retains his current position as president and CEO of Exelon. The statement further noted that Joseph Rigby, previously chairman, president and CEO of Pepco Holdings, retires as an officer of Pepco Holdings, with David Velazquez assuming the role of the company’s president and CEO.
“Today, we join together as one company to play a vital role as a leader in our industry and the mid-Atlantic region,” Crane said in the statement. “We’ve made a number of commitments to customers in all of the Pepco Holdings utilities’ jurisdictions – the District, Maryland, Delaware and New Jersey – and we look forward to getting to work to deliver those benefits to our customers and communities.”
Velazquez said in the statement: “In addition to firm reliability commitments, the merger provides benefits to our customers and continues and expands our role as a partner in the communities we serve. This new era will bring a new level of service excellence and economic and environmental benefits to our customers, while maintaining our leadership and partnerships in our local communities.”
Rigby said in the statment, “Our combined companies will bring meaningful economic and service benefits to Pepco, Delmarva Power and Atlantic City Electric customers.”
The transaction was approved by Pepco Holdings’ shareholders, and regulatory approvals have been issued by FERC, the New Jersey Board of Public Utilities, the Delaware Public Service Commission (PSC), the Maryland PSC, and the Virginia State Corporation Commission, in addition to the PSC of the District of Columbia, the statement noted.
As a result of the closing of the merger, trading of Pepco Holdings’ common stock on the New York Stock Exchange will be suspended effective March 24, and those shares will no longer be listed on the New York Stock Exchange, the statement added, noting that Pepco Holdings stockholders will receive $27.25 per share.
District regulators’ order reflects split
By a 2-1 vote, with Betty Ann Kane, chairman of the PSC of the District of Columbia, dissenting, the PSC on March 23 approved the merger, as modified by the terms and conditions set out in Option 2 presented in the companies’ request for other relief, filed on March 7, with one additional term, the PSC said in a separate March 23 statement.
The modifications conform the merger application to the terms of the revised non-unanimous settlement agreement (RNSA) proposed by PSC Commissioner Joanne Doddy Fort in a Feb. 26 order by the PSC, with the addition of the incremental offset that was included in the non-unanimous settlement agreement (NSA) that was rejected by a majority of the commission. PSC Commissioner Willie Fort, in the Feb. 26 order, dissented to the rejection of the NSA, the PSC added.
The companies then filed a request for other relief, which the PSC granted. The companies’ request sought PSC action on one of three options: adopt the NSA (Option 1); adopt the RNSA (Option 2); or adopt a new proposal (Option 3), the PSC said.
As TransmissionHub reported on March 7, Exelon President and CEO Christopher Crane said in a statement: “We’re prepared to deliver the benefits of our original merger settlement or to accept all of the terms the commission concluded would place the merger in the public interest. We have also offered a third option that aims to balance the alternate terms the commission offered in its Feb. 26 order with the views of some of the settling parties on the issue of rate credits to residential customers.”
Pepco Holdings Chairman, President and CEO Joseph Rigby said in the statement: “The commission and the settling parties are in agreement that the value of the overall benefits we have committed to the District is appropriate – it’s essentially a question of how those benefits are allocated for the District. To safeguard these benefits for the District and its residents, we are putting before the commission several options that will allow the merger to move forward.”
Noting that all of the parties, as well as some community members, filed comments on the companies’ request, the PSC said in its March 23 statement that after considering all comments, the majority of the PSC voted to adopt the terms and conditions set out in Option 2, with the addition of an incremental offset. The PSC also said that it modified the terms of the RNSA to retain this tool to use in its next base rate case, along with the base rate credits to mitigate impacts of a future rate increase on ratepayers.
“Accordingly, the commission has concluded that the proposed merger, under the terms and conditions now set out in Attachment A to the order, is in the public interest,” the PSC said. “The merger as approved retains all of the benefits negotiated by the settling parties in the NSA with the exception of the four changes outlined in” the Feb. 26 order.
The PSC said that it concluded that the merger will benefit ratepayers and the District because it includes:
- A $72.8m Customer Investment Fund (CIF), including $25.6m in rate base credits
- $11.25m in funds for energy efficiency and energy conservation programs, especially for low and limited income residents
- $21.55m to promote the District’s sustainability agenda through pilot projects to modernize the electric distribution grid to accommodate more distributed energy resources
Those benefits, among others, would not be available to District ratepayers if the merger is not approved, the PSC said.
Kane dissents, citing loss of control
During the PSC’s March 23 meeting, Kane said: “I want to thank everyone who was involved in this case – it has been almost two years since the application was filed – both the commission staff, the parties, the advocates [and] the community. This was a very lengthy and a very important case before us.”
In her dissenting opinion, Kane said that she continues to find that the change in control and acquisition of Pepco by Exelon is not in the public interest. “Indeed, developments in the record since my ‘No’ vote on February 26, 2016 give me even stronger reasons to find that the takeover of the District’s electric distribution company by a multi-faceted vertically integrated generation-focused holding company, as proposed in the order before us, benefits Pepco and Exelon shareholders but does not provide sustainable benefits to District ratepayers, places Pepco within a structure that is contrary to District law and policy, and should be rejected,” she said.
In the PSC’s Feb. 26 order, the majority of the PSC found that if the changes proposed by Fort to the NSA were accepted by of the settling parties, the revised NSA would be “deemed approved as being in the public interest … without necessity of any further commission action,” Kane noted.
She added, “There is some value in settlements, which can represent compromise as well as the avoidance of further costly litigation, which I assume is why the majority required the agreement of all the settling parties in order for the revised NSA to be deemed in the public interest. However, almost all of the settling parties have soundly rejected the proposed alternative terms, as have all of the non-settling parties. Any potential value that can come with a settlement is gone. We are left with a commission-proposed terms of acquisition which must be decided, in the face of near-unanimous opposition, based ‘on its merits.’”
Among other things, she said that none of the revisions to the 142 terms of the proposed acquisition change the fundamental inherent conflict that has led her on two prior occasions to find that the proposal is not in the public interest. “There are many promises and a lot of money being offered,” she said. “Expensive wedding gifts are nice. But all the wedding gifts in the world can’t make a bad marriage good.”
Revised terms and conditions outlined in order
The order listed revised terms and conditions for the merger, including that Exelon will provide the CIF to the District with a value totaling $72.8m, and representing a benefit of $215.94 per distribution customer, based on a customer count of 337,117 as of Dec. 31, 2013. Pepco will not seek recovery of the CIF in utility rates.
The revised terms and conditions also noted that Exelon will provide the customer base rate credit in the amount of $25.6m, which can be used as a credit to offset rate increases for Pepco customers approved by the PSC in any Pepco base rate case filed after the close of the merger until the customer base rate credit is fully utilized. Exelon will also provide an incremental offset of up to $1m per year to be treated as a regulatory asset with a 5% return. The parties in the next Pepco base rate case will be provided an opportunity to propose to the PSC how the customer base rate credit and incremental offset will be allocated among Pepco customers and over what period of time. No portion of the customer base rate credit is to be recovered in utility rates.
Furthermore, Exelon will fund a one-time direct bill credit of $14m to be distributed among Pepco residential customers. The credit is to be provided within 60 days after the merger closing based on active accounts as of the billing cycle commencing 30 days after the merger closing.
Within six months after consummation of the merger, Exelon will colocate Exelon corporate headquarters in the District for Exelon Corporate Strategy and Exelon Utilities (EU), the organization that oversees the utility businesses of Exelon. Exelon is to do so by moving the headquarters of Exelon Utilities and Exelon Corporate Strategy to the District; and by moving the primary offices of Exelon Utilities’ CEO, Exelon’s CFO and Exelon’s Chief Strategy Officer to the District. Exelon’s CEO will also have an office in the District. Exelon will maintain the above in the District for at least 10 years, and will also maintain the Pepco Holdings and Pepco headquarters in the District for at least 10 years.
The revised terms and conditions also noted that in addition to honoring its existing collective bargaining agreements, Pepco will use best efforts to hire, within two years after the merger closing date, at least 102 union workers in the District. The incremental cost of these hires will be included in rates only to the extent that the workers have actually been hired, and in any event will not be included in customer rates until after Jan. 1, 2017.
For at least five years after the merger closes, Exelon is to not permit a net reduction, due to involuntary attrition as a result of the merger integration process, in the employment levels at Pepco’s utility operations in the District.
Pepco will continue to operate within the District as an electric public utility subject to the continuing jurisdiction of the PSC under the District of Columbia Public Utilities Act, and without any reduction in the PSC’s existing oversight or authority over Pepco.
Among other things, the revised terms and conditions also noted that Exelon commits that Pepco and Pepco Maryland, Atlantic City Electric , Delmarva Power, PECO, and BGE are to remain members of PJM Interconnection until Jan. 1, 2025; provided, however, that if there are significant changes to the structure of the industry or to PJM, including markets administered by PJM, during that period that have material impacts on Pepco and Pepco Maryland, ACE, Delmarva Power, PECO or BGE, then any of those companies may file with FERC to withdraw from PJM.