District of Columbia Court of Appeals affirms District of Columbia regulators’ approval of Exelon/Pepco merger

Exelon (NYSE:EXC) on July 20 said that the District of Columbia Court of Appeals has affirmed the approval of the Public Service Commission (PSC) of the District of Columbia of Exelon’s merger with Pepco Holdings (PHI).

The company noted that the merger combined its three electric and gas utilities, BGE, ComEd and PECO, with PHI’s three electric and gas utilities, Atlantic City Electric, Delmarva Power, and Pepco.

As noted in the court’s opinion, which was decided on July 20, the petitioners – the Office of the People’s Counsel (OPC), the District of Columbia Government, and DC Solar United Neighborhoods jointly with Public Citizen, Inc., (collectively DC SUN) – sought review of the PSC’s decision that approved the merger application involving Exelon’s purchase of PHI and its subsidiary, Pepco.

The court noted that the petitioners argued that the PSC made procedural errors, exceeded its statutory authority, approved merger terms that are contrary to law or unreasonable, did not clearly explain its reasoning, and failed to make an independent finding that the merger was in the public interest.

History of case

In June 2014, Exelon, Pepco, and various related entities asked the PSC to approve a merger involving Exelon’s purchase of PHI, the court noted, adding that the PSC in August 2015 concluded that the merger, as proposed, was not in the public interest.

In October 2015, the companies moved to reopen the record for the PSC to consider a nonunanimous settlement agreement (NSA) executed by the companies, OPC, the District, and several other parties (referred to as the settling parties). The court added that the PSC in February 2016 concluded that the NSA was not in the public interest. One PSC commissioner concurred, but proposed a revised NSA (RNSA) that she believed would be in the public interest, and the settling parties were instructed to file a notice with the PSC indicating whether they wished to accept the RNSA or instead to request further relief, the court said.

The companies filed a request for other relief, asking that the PSC approve the merger in accordance with the terms outlined in the NSA, the terms of the RNSA, or the terms of a third “middle ground” proposal, the court said, noting that the petitioners opposed that request.

The PSC in March 2016 approved the merger under the terms of the RNSA with one additional revision, and denied the petitioners’ applications for reconsideration, the court noted.

The court said that its review of the substance of the PSC’s decisions is “the narrowest judicial review in the field of administrative law.”

Arguments before court

Noting that the PSC in October 2015 gave notice that it would hold a public interest hearing on the merits of the NSA starting on Dec. 2, further advised that it would hold a community hearing at a date and time to be announced, and on Nov. 5 issued an order giving 12 days’ notice of the community hearing, the court said that DC SUN argued that the PSC’s notice of those hearings was inadequate.

“Because the commission addressed the notice issue on the merits, and because we uphold the commission’s decision, we see no need to address the question whether the notice issue was properly raised before the commission,” the court said. “For similar reasons, we also decline to address whether a number of petitioners’ other objections were adequately preserved.”

The court said that it concludes that the PSC provided reasonable public notice of the hearings relating to the NSA.

Noting that the District argued that the NSA considered as a whole was in the public interest and that the PSC lacked authority to require changes to the NSA to further advance the public interest, the court said that it concludes that the PSC’s authority was not so limited.

Before approving the proposed merger, the PSC was required not only to determine that “said consolidation will be in the public interest,” but also to “approve[] in writing the terms upon which said consolidation shall be made.”

The court also said that it does not agree with DC SUN’s argument that the PSC erred in “shoring up” the NSA by suggesting additional terms to the parties. The court noted that the PSC’s regulations explicitly allow it to propose alternative terms after rejecting a settlement.

The PSC adequately explained its decision to take that approach in response to the NSA even though it had not proposed alternative terms when presented with the original merger application, the court said. Specifically, the PSC explained that the “base of benefits [was] substantially higher” in the NSA than in the original application; that in crafting the NSA, the settling parties had “endeavored to address all of the deficiencies in the original [a]pplication,” and that as a result, “the changes needed to cure the remaining deficiencies were few[ and] clearly suggested by the evidentiary record.”

The court also noted that DC SUN and OPC argued that the PSC’s procedures following the rejection of the NSA were unfair, contrary to law, and inadequately explained.

The court said that it concludes otherwise, noting, for instance, that DC SUN and OPC contend that they did not have an adequate opportunity to address concerns raised by the RNSA because the PSC did not give them notice that it might grant the companies’ request for other relief without further discovery or hearings.

“We see no unfairness in the commission’s decision to grant applicants’ request for other relief without sua sponte directing further discovery and hearings,” the court said. “The commission had already held extensive proceedings with respect to the initial application and the NSA; the RNSA differed from the NSA in only a few discrete respects; applicants’ request for other relief explicitly asked for a ruling based on the existing record; and none of the petitioners asked for further process when opposing the request for other relief. Under the circumstances, we conclude that if petitioners believed that further discovery or hearings were necessary, they were obliged to bring that point to the commission’s attention before the commission ruled on applicants’ request.”

The court also addressed an escrow account, noting that in approving the merger, the PSC required Exelon to place more than $32m into such account, to be disbursed at the PSC’s direction, to fund projects supporting energy efficiency, energy conservation, and modernization of the energy-delivery system. The District argued, for instance, that that requirement violates the Clean and Affordable Energy Act of 2008, which the District construes as having “terminated the commission’s authority over such programs.”

The court said that it does not address such arguments because the District failed to present them at any point during the proceedings before the PSC.

Among other things, the court noted that the District and DC SUN objected that the PSC scattered its reasoning across multiple orders instead of providing a single order fully explaining its analysis.

Noting that it acknowledges that a few sentences in the PSC’s orders, considered in isolation, could arguably be read to support the petitioners’ concerns, the court said, “We are confident, however, that the commission’s orders taken as a whole demonstrate that the commission applied the correct standard and adequately explained its decision.”

Responses to opinion

In a July 20 statement provided to TransmissionHub on July 21, OPC noted that it had challenged the PSC decision as legally flawed and asked the court to send the case back to the PSC to provide OPC with an opportunity to argue for the restoration of consumer benefits that OPC had bargained for in previous negotiations with Exelon.

“The court’s decision means that it is imperative for OPC to focus its efforts toward ensuring District consumers receive the maximum benefits that we believe are due to them,” People’s Counsel Sandra Mattavous-Frye said in the statement. “We will view the ruling as impetus to fight even harder against any and all actions that may harm ratepayers.

In a separate July 20 press release, David Arkush, managing director of Public Citizen’s Climate Program and counsel for DC SUN and Public Citizen, said, “We are disappointed that the court upheld the decision and are considering our next steps.”

Among other things, Arkush said: “The Public Service Commission twice rejected Exelon’s attempt to take over Pepco because the deal was bad for the District. Less than a month after the second rejection, the commission shocked the parties and the public by granting the takeover via a 2-1 vote over the opposition of virtually everyone except Exelon and Pepco. That reversal was the result of a rushed and unfair process that shut out the public and consumer advocates at the most critical points in the case. And despite producing more than 300 pages of opinions on the deal, the commission has never explained exactly why it thinks Exelon’s takeover of Pepco is good for the District.”

In a July 21 post on its website, DC SUN said, in part: “The court’s ruling ignored the Public Service Commission’s rushed and unfair public process that led to approval of Exelon’s takeover bid. The Commission can still not explain why it believes the merger is in the public interest. Yesterday’s decision sets a terrible precedent that privileges the interests of big businesses over the needs to D.C.’s community. Fortunately, this multi-year process has created a stronger, and more active solar community. We are more able than ever to stand up for D.C. residents.”

Speaking with TransmissionHub on July 21, PSC Chairman Betty Ann Kane said, “We are very, very pleased with the court’s decision,” which she said was unanimous and strong.

Kane added: “The appeal was primarily on procedural grounds and the court very strongly upheld the extensive and detailed process that the commission used over almost two years to consider the matter. I’m very proud of our staff [and] our attorneys, who argued the case successfully in the Court of Appeals. I’m very pleased with the praise that the court, particularly [Senior] Judge [Michael William] Farrell in his concurring opinion, gave to the work of the commission and the deference that they have traditionally given to the commission in terms of our decision-making.”

According to the opinion, Farrell said, in part, “I tip my hat – and have little doubt my colleagues do also – to the gruelingly conscientious work of the commission in treating and resolving the issues in this case, one it recognized as importantly affecting the welfare of the District’s residents going forward.”

Kane noted that “on the substance of the merger, I did not approve it – it was a 2-1 vote. But, this appeal was primarily on process and it upheld very clearly the exhaustive process that the commission used.”

She continued: “There is no longer any kind of cloud over the commission’s decision. The merger actually closed a year ago and things have been proceeding, and, to date, Pepco has kept the commitments that were made.”

In its July 20 statement, Exelon said: “As a result of the merger, customers are seeing improved efficiency, reliability and a broad array of other benefits. Today, the court upheld the Public Service Commission’s order, resolving all legal challenges in the District of Columbia and enabling us to remain focused on providing safe, reliable and affordable energy to all of our customers.”

About Corina Rivera-Linares 3054 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 15 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.