The D.C. Public Service Commission Tuesday denied Chicago-based Exelon’s proposed $6.4 billion takeover of Pepco Holdings, a major setback for the giant utility marriage.
The three-member commission unanimously rejected the utilities’ application, saying it was not in the best interests of the ratepayers.
The commission said it found no evidence the combination would improve the reliability of service and the panel expressed concern about a new management structure at Exelon that would not include a Pepco member on its executive committee, “thereby diminishing the influence of Pepco within the new structure.
“Pepco will become a second tier company in a much larger corporation whose primary interest is not in distribution, but in generation. At a time of change in the energy field, Pepco’s ability to adapt will be constrained by an increased management bureaucracy. We are also concerned about the inherent conflict of interest that might inhibit our local distribution company from moving forward to embrace a cleaner and greener environment.”
Pepco and Exelon have 30 days to ask the commission to reconsider.
“We are disappointed with the Commission’s decision and believe it fails to recognize the benefits of the merger to the District of Columbia and its residents and businesses,” Pepco said in a statement filed Tuesday afternoon with the U.S. Securities and Exchange Commission. “We continue to believe our proposal is in the public interest and provides direct immediate and long-term benefits to customers, enhances reliability and preserves our role as a community partner. We will review our options with respect to this decision and will respond once that process is complete.”
The commission cited the amount of input from both proponents and opponents to the decision, calling it one of the most important cases in the regulatory body’s history.
More than 3,000 residents, small businesses and non-profits submitted testimony on both sides. There were four community hearings and comments from 26 Advisory Neighborhood Commissions, several smart-energy groups, and at least six members of the D.C. Council.
“The public policy of the District is that the local electric company should focus solely on providing safe, reliable and affordable distribution service to District residences, businesses and institutions,” said commission chairman Betty Ann Kane in her statement announcing the decision. “The evidence in the record is that sale and change in control proposed in the merger would move us in the opposite direction.”
Commissioner Willie L. Phillips appeared to leave the door open for reconsideration, calling the proposal, as filed, “a bad deal for the District.”
“I am disappointed in the loss of the many opportunities that could have achieved benefits for our local communities and across the region,” Phillips said in his statement.
Sandra Mattavous-Frye, people’s counsel for the District of Columbia, said the Public Service Commission’s standard for reconsideration is very narrow.
“As long as they can demonstrate that they considered all the facts and factors, and that they have carefully articulated their reasoning, their decision will stand,” she said, adding, “I am not amenable to any settlement. The train is certainly out of the depot.”
Karyl Leggio, a finance professor at Loyola University’s Sellinger School of Business in Baltimore, said reviving the deal with depend on how much Exelon wants to give up to the regulator and to opponents such as Power DC, a coalition of local citizens and interest groups that opposed the merger.
“I don’t think it’s at all dead,” said Leggio, who specializes in mergers, acquisitions and utilities. “They have 30 days to go back to the Public Service Commission. Power DC has been pretty clear about the things that they want. They want Pepco to have a voice on the Exelon board. They want improved performance by Pepco, which I take to be infrastructure investments. And they want to not feel like they are a little cog in a big organization. All of those things are very doable. But they all cost money. Exelon is at the point when they have to decide how many concessions they can make and still be a viable, value add merger.”
D.C. Mayor Muriel E. Bowser said she supported the commission’s action, and hinted she may be pushing for more concessions. Senior members of her administration planned to meet with commission chairman Kane to explore next steps, according to one official in the mayor’s office who spoke on condition of anonymity because of the sensitivity of the deliberations.
“Moving forward, we want to ensure that D.C. utility ratepayers receive quality service, that we maintain and grow jobs in the District, and that we keep DC on our continued path toward sustainability,” Bowser said in a statement.
Exelon has already tried to sweeten the deal with commitments such as maintaining local operational headquarters, including the District, where the utility promised no merger related job losses for at least two years, keeping two key local executives in charge and an increase in charitable donations for the next decade above Pepco’s 2013 level of $1.6 million per year.
The utilities also agreed to reliability improvements, including a project to run some power lines underground. The utility agreed to pay up to $5.6 million in penalties if it does not achieve certain reliability objectives.
Still, the commission’s decision was a blow to the companies. Pepco shares dropped 17 percent on the news, while Exelon dropped 3 percent.
The rejection was the last regulatory hurdle for the companies. The merger had been approved by the Federal Energy Regulatory Commission, the U.S. Department of Justice and by the states of Maryland, Delaware and New Jersey.
The two companies announced in April 2014 that Chicago-based nuclear energy giant Exelon would be acquiring Pepco in an all-cash transaction, which is a $2.5 billion premium above the value of the Washington-based utility’s assets prior to the announcement.
Power DC applauded the decision.
“Thousands of those customers, dozens of Advisory Neighborhood Commissions, and at least six D.C. Councilmembers strongly opposed Exelon’s acquisition of Pepco because it is not in the public interest of the District,” the organization said in a statement following the decision.
“As the Commission recognized in its decision, the proposed acquisition would have been a substantial step backwards in the District’s efforts to move toward more sustainable electricity generation and greater reliance on local, renewable energy. It would have exposed D.C. residents and businesses to the risk of steeply rising electricity bills.”
The deal would create the Mid-Atlantic’s largest gas and electricity provider.
Dave Oberting, executive director of Economic Growth DC, a pro-business coalition, said the rejection will have a chilling effect on new business investment.
“People who are thinking about doing business in the District are paying attention,” he said. “The thing the District needs most is foreign direct investment, and they way that happens is through mergers and acquisitions. Companies who are thinking about acquisitions in the District are going to think twice.”
Pepco Holdings is a century-old Washington-based utility scorned in recent years for its service lapses following hurricanes, thunderstorms and the 2012 derecho. The utility had said a merger with Exelon would provide scale and services that would allow it to recover power for its customers more quickly following disruptions.
Exelon, guided first by longtime chief executive John Rowe and now by chief executive Christopher Crane, was formed by the 2000 merger of Chicago’s Unicom with Peco Energy, Philadelphia’s electric utility, creating a Fortune 100 company with the nation’s largest fleet of nuclear power plants. In 2009, Exelon dropped a hostile takeover bid for NRG after it failed to win support from NRG shareholders.
Exelon’s vast portfolio of nuclear power plants generates 55 percent of the power it sells. Its reactors are at 14 facilities in Illinois, Maryland, Nebraska, New Jersey, New York and Pennsylvania. It also owns 32 fossil fuel plants that stretch from Utah to Texas to Massachusetts.
Staff writer Aaron C. Davis contributed to this report.