D.C. Mayor Muriel E. Bowser reversed course and backed a proposed takeover of Pepco, the city’s electric utility, by Exelon, a Chicago-based nuclear energy giant. Now she’s urging D.C. regulators to do the same, saying the deal her office negotiated is worth an about-face.
But Bowser’s endorsement has raised an obvious question as the District’s Public Service Commission is poised to decide as early as Friday whether to fast-track its review of the Bowser-backed proposal: Is it worth it?
Bowser has said she agreed to back the $6.4 billion merger after a month of private negotiations because Exelon’s final offer would increase the reliability of the city’s electric grid. It would also create a utility with a healthier balance sheet, she said, and give residents a four-year freeze on residential electric rates.
Bowser’s critics see it differently: The District sold out and got little in return, they say. Rates won’t be frozen, they note. Instead, Exelon will absorb up to $26 million in rate increases until 2019. After that, ratepayers could face sticker shock — multiple years’ worth of rate increases at once.
Even as they have praised the proposed merger as a windfall for stockholders, analysts on Wall Street have also cast doubt on whether Pepco needs a merger to remain a profitable business.
Environmentalists and opponents in neighboring Maryland, meanwhile, dispute that a merger would lead to any better assurances that the lights will stay on in the nation’s capital and its northern suburbs.
Nothing in the mayor’s deal “addresses the underlying and fundamental” problems, said Paula Carmody, the people’s counsel for the state of Maryland, which is appealing the decision of regulators there to approve the merger.
Bowser and other advocates for the proposed merger in the District, Carmody said, “are counting the benefits . . . but on the harm side, they are not mitigating or eliminating any of them.”
The D.C. Public Service Commission unanimously rejected the proposed merger Aug. 25, tripping up the mega-deal on one of its final regulatory hurdles.
The PSC said the merger would create an inherent conflict by forcing the District to buy energy from a nuclear energy producer even as the city has made encouraging green energy a top priority.
Bowser initially suggested that she agreed. After being lauded by the Obama administration for signing a deal two years in the making to buy wind energy to power city buildings, she issued a statement saying she supported the PSC’s rejection of the merger.
But that same day, Bowser took a step that no other executive in the four states where regulators had approved the merger had: She initiated private negotiations. Bowser dispatched her city administrator, Rashad M. Young, and one of her top administration attorneys, Mark H. Tuohey, to try to secure a better deal, according to top Bowser aides who spoke on the condition of anonymity to freely discuss the evolution of the talks.
The aides said that Bowser remained focused on getting the best deal for ratepayers and watched as the total compensation that Exelon would offer to the District ticked upward, ultimately more than doubling to $78 million.
As negotiations wore on, however, another concern took hold and began driving efforts toward a deal. Business leaders and nonprofit groups that benefit from Pepco’s almost $2 million in annual philanthropy said they were told by the utilities that the money could be cut off if a merger did not go through.
“The financial health of the District’s utility became a real concern,” Bowser said in an interview.
Wall Street investors, utility analysts and the energy industry are closely watching the final maneuvers in the District. Some said the outcome of the deal could have a bearing on both companies, but for different reasons.
Exelon, for example, is trying to diversify and reduce its reliance on its sprawling nuclear plant holdings, hoping to tap into reliable regulated businesses such as Pepco. Exelon also bought Constellation Energy, formerly Baltimore Gas & Electric, which is also heavily regulated.
Exelon-Pepco “is probably the largest utility merger that we have going on right now,” said Paul Patterson, a utilities analyst with Glenrock Associates. “Within the utility industry, this is quite significant because of the size of the transaction and the stability that Pepco operations will provide to Exelon, which has a large nuclear fleet that has economic challenges in the current power-price environment.”
Some analysts said that if the PSC kills the deal, it would likely leave Pepco with a lower stock price than the premium Exelon is offering. It could also result in a less-secure balance sheet than if the merger went through, because Pepco pays out a higher proportion of its earnings in dividends.
The plan won the backing of vocal critics such as Sandra Mattavous-Frye, the District’s people’s counsel, meaning that only a handful of poorly funded opponents, such as DC Solar United Neighborhoods, will be left to question the plan as it goes before the PSC.
Anya Schoolman, head of DC SUN, said the organization will file comments in opposition on Friday and that the merger would do little to help D.C. residents and private businesses encourage more sustainable-energy production. Bowser’s deal is “smoke and mirrors,” she said.