VIDEO: A look at Maryland’s approval of the Exelon/Pepco merger

The Maryland Public Service Commission, in a 3-2 decision approved, with conditions, the application to merge Exelon with Pepco Holdings

May 19th, 2015
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Exelon and Pepco Holdings, in a May 18 joint statement, said that they have completed reviewing the Maryland state regulators’ order approving their merger and have committed to fulfill the modified conditions and package of customer benefits imposed by the order.

The Maryland Public Service Commission (PSC), in a 3-2 decision on May 15 approved, with conditions, the application to merge Exelon, Pepco Holdings, and Pepco Holdings’ Delmarva Power and Potomac Electric Power Co. (Pepco).

The PSC also said in its May 15 statement that its approval lists 46 conditions, including higher reliability standards. The PSC further noted that it approved two settlement agreements between the companies and multiple parties in the case with some modifications.

In approving the merger, the PSC said, “[w]e find that the proposed merger, as conditioned by this order, is consistent with the broader public interest, will bring specific and measurable benefits and no harm to ratepayers.”

In their statement, the companies noted that the merger will bring together Exelon’s three gas and electric utilities — Baltimore Gas and Electric (BGE), Commonwealth Edison (ComEd) and PECO — and Pepco Holdings’ three electric and gas utilities — Pepco, Delmarva Power and Atlantic City Electric — “to create the leading mid-Atlantic electric and gas utility.”

Noting that the companies are pleased that the PSC found the proposed merger to be in the public interest, Exelon President and CEO Chris Crane added in the statement: “After a thorough review of the order, we have concluded that it is constructive, but the conditions it imposes — including those to which the companies already committed in our settlement — will also be challenging. It poses some stringent conditions that will be difficult to fulfill, but all of us at Exelon accept the challenge and commit to proving ourselves in an expanded role in Maryland.”

Pepco Holdings Chairman, President and CEO Joseph Rigby said in the statement that together, Exelon and Pepco Holdings utilities will be able to provide better customer service and reliability in the state than Pepco and Delmarva Power could without the merger.

“We look forward to delivering on the commitments we’ve made and which the commission has expanded: economic benefits, as well as increased reliability, energy efficiency and clean energy, as part of a long-term commitment to Maryland,” he said.

In its order, the PSC noted that opposing parties argued that the fact of serving 80 percent of Maryland distribution customers — if the merger is approved by all jurisdictions — may give Exelon a significant advantage in influencing the nature of the electric distribution industry in Maryland.

“Because Exelon already controls the largest distribution utility in Maryland, BGE, they argue that adding Delmarva and Pepco will make it the dominant voice when it comes to policy – a voice, the parties claim, that the commission will be unable to regulate effectively,” the PSC added. “While we are cognizant of the impassioned concerns of the opposing parties and our dissenting colleagues, we find that these concerns are either not supported in the record or have been adequately mitigated by the conditions we set forth in this order.”

The PSC said that it finds that the merger will enable Delmarva Power and Pepco in Maryland to improve their reliability performance more quickly than they would without the merger.

“We find that their day-to-day normal weather outages will be reduced, their distribution infrastructure will be improved more quickly and at lower cost, and their ability to recover from outages following major storms will be improved, all because of the merger,” the PSC said.

Among the conditions listed in the order, Exelon is to fund a one-time direct rate credit of $100 per Pepco Maryland residential customer, $50 of which is to be credited within 60 days after consummation of the merger, and the remaining $50 to be credited in the billing cycle occurring 12 months after the first installment. The Pepco Maryland residential direct rate credits will amount to about $48.6 million, and are not to be recoverable in rates.

Exelon is to fund a one-time direct rate credit of $100 per Delmarva Power Maryland residential customer in direct rate credits, $50 of which is to be credited within 60 days after consummation of the merger, and the remaining $50 to be credited in the billing cycle occurring 12 months after the first installment. The Delmarva Power Maryland residential direct rate credits will amount to about $17.4 million, and are not to be recoverable in rates.

Also, Exelon is to provide funding for energy efficiency programs through a customer investment fund of $43.2 million for the benefit of Delmarva Power and Pepco customers in each utility’s service territory in Maryland. Exelon is to provide $31.5 million in funding for energy efficiency program support, including about 20 percent for limited-income customers, in the Pepco Maryland service territory for programs to be directed and administered by Prince George’s and Montgomery counties. Exelon is to provide Delmarva $11.7 million in funding for incremental energy efficiency program support in the Delmarva Maryland service territory.

Another condition called for Exelon to establish a green sustainability fund to stimulate public and private investment within Pepco’s Maryland service territory in solar, storage and other behind-the-meter and distributed generation; energy efficiency and whole home solutions; utility 2.0; resiliency measures; microgrids; water conservation in buildings; clean transportation; community solar; and similar developing energy technologies. The fund is to include a $14.4 million allocation to the Pepco Maryland service territory.

Also, Exelon and its subsidiaries are to support development of renewable generation. For instance, Exelon is to, by Dec. 31, 2018, develop or assist in the development of 15 MW of solar generation in Maryland — 5 MW of which will be located in Prince George’s County, 5 MW of which will be located in Montgomery County, and 5 MW of which will be located in the Delmarva Power service territory.

In terms of reliability and quality of service, Delmarva Power and Pepco commit to improve system reliability in their Maryland service territories and to achieve certain minimum annual reliability performance levels as measured using the PSC’s current methodology for calculating SAIFI and SAIDI, with the exclusion of major outage events. For instance, in 2016, Pepco commits to a SAIFI of 1.05 and a SAIDI of 124, while Delmarva commits to a SAIFI of 1.41 and a SAIDI of 151.

The conditions further noted that if certain SAIFI or SAIDI reliability performance levels are not met in any of the years 2018, 2019 or 2020, then Delmarva Power and/or Pepco is to automatically make a compliance payment to the Electric Reliability Remediation Fund.

Exelon is to achieve the proposed reliability standards without exceeding the annual capital and O&M spending levels set forth in the conditions, absent a major outage event requiring increases in reliability related spending to restore service and facilities.

Among other things, the conditions also noted that Exelon commits that Atlantic City Electric, Delmarva Power, Pepco, PECO and BGE are to remain as 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 during that period that have material impacts on those companies, then any of them may file with FERC to withdraw from PJM.

In a dissenting opinion, Commissioners Harold Williams and Anne Hoskins said that the proposed merger raises profound questions about whether Maryland residents and businesses will be harmed from the transaction.

“After a lengthy and highly contentious evidentiary proceeding, we find the [companies’] answers insufficient, and the mitigation offered wholly inadequate, to conclude that this merger is consistent with the public interest and imposes no harm, as mandated by the General Assembly,” the commissioners said. “The merger application should have been denied.”

The commissioners claimed that the proposed merger will undermine competition, increase rates, and eviscerate economic protections due to a weakened and compromised corporate governance structure.

“Maryland will lose its wires-only electric utilities, Pepco and Delmarva, which will be purchased by an energy conglomerate concerned with protecting its vast fleet of electric power plants, from which it derives most of its revenue,” the commissioners said. “Exelon’s economic interests to shield that fleet from emerging distributed energy technologies and other competitive threats are inherently misaligned with the interests of the customers of Pepco and Delmarva, who are predominantly concerned with efficient, cost-effective and reliable electric service. The merger will also silence [Pepco Holdings’] unique voice, which currently provides an invaluable non-generation perspective to the commission on how to address the myriad issues we confront in the energy industry, from advanced metering, to demand response and integration of renewable resources.”

Among other things, the commissioners also said that the merger will extinguish the inter-utility competition that has existed between BGE and Pepco/Delmarva Power, “which in turn will chill the incentives for the state’s utilities to innovate.”

The merger still requires approvals by regulators in the District of Columbia and Delaware, the companies said in their statement, adding that in February, Exelon reached a settlement agreement with staff of the Delaware PSC and other stakeholders, and the agreement is pending approval by that PSC. Also, following the expiration of the U.S. Department of Justice’s review period on Dec. 22, 2014, the Hart-Scott-Rodino Act no longer precludes completion of the merger.

The Delaware PSC said on its website that it heard testimony on April 7 from all parties involved in the merger issue. An amended settlement agreement was submitted to the PSC for consideration, the PSC said, adding that it will vote on the matter at a later date, pending the merger negotiation discussions in Maryland and the District of Columbia.

The companies said in their statement that New Jersey state regulators approved the transaction in February, while FERC approved it last November, and Virginia state regulators approved it last October. The companies further noted that Pepco Holdings stakeholders approved the transaction last September.

The companies said that they expect to complete the merger in 2Q15 or 3Q15.

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