By Rich Heidorn Jr. and Ted Caddell

Exelon’s proposed $6.8 billion acquisition of Pepco Holdings Inc. should clear federal regulatory hurdles easily but may face a tougher time winning support from the states.

The Federal Energy Regulatory Commission and the Justice Department should have few concerns because the Pepco acquisition will bring Exelon no additional generation and thus raise no supply-side market power concerns.

“I think [the regulatory risk is] pretty low at FERC and DOJ,” said an attorney who specializes in utility mergers.

“It sounds like it’s going to be a state battleground as opposed to anything at the national level,” agreed a former New Jersey regulator. “Those guys are going to be spending a lot of time in the state capitols to try to gin up support … lobbying the legislature, talking to the governors’ offices, Chambers of Commerce.”

Exelon has had plenty of experience with mergers. The company was formed from the 2000 pairing of Philadelphia’s Peco Energy and Chicago’s Commonwealth Edison. It grew further with the 2012 acquisition of Baltimore’s Constellation Energy. The company has also had its share of failures, dropping a merger with Public Service Enterprise Group in 2006 and having its overtures spurned by PPL in 1995 and NRG in 2009.

In a call with securities analysts Wednesday, Exelon CEO Christopher Crane said he was confident the deal will be approved. “The regulatory process is not easy in any jurisdiction,” he said. “We learned a lot from things that worked and things that haven’t worked in the past.”

Regulatory Hurdles

Exelon said it expects to make applications for regulatory approvals within 60 days in hopes of closing the deal in the second or third quarter of 2015.

Under the Federal Power Act, FERC must approve mergers that are “consistent with the public interest.” The commission makes that determination based on the effects on competition, rates and regulation (RM11-14).

Approvals will also be required from the District of Columbia and Maryland (served by Potomac Electric Power Co.), Delaware (Delmarva Power & Light), New Jersey (Atlantic City Electric Co.) and Virginia, where PHI owns property.

FERC has 180 days to rule. Maryland is required to rule within 225 days. Decisions in other jurisdictions may take slightly longer, Exelon said.

Positive Benefits Test

The states will insist the deal provide “positive benefits” or at least no harm. In interviews, state consumer advocates said they will be measuring the deal primarily based on its impact on rates and service quality.

Exelon said the Pepco deal would bring $250 million in “synergies” over the first five years. In its opening bid to the states, Exelon Wednesday proposed a split giving ratepayers two-thirds of the savings with shareholders keeping one-third.

Will that be enough? The states involved have reputations as tough negotiators.

Delaware Public Advocate David L. Bonar said he will push for a deal as attractive to his ratepayers as that offered to Baltimore Gas & Electric customers as a condition for Exelon’s takeover of Constellation. “We think in the long run this will be good for consumers,” he said.

New Jersey Division of Rate Counsel Stefanie A. Brand said she wasn’t sure how generous Exelon’s two-thirds offer is. “I’m not sure what’s typical,” she said. “These don’t come around very often.”

Feelings between New Jersey regulators and Exelon are still bruised by their experience in the failed $17 billion Exelon-PSEG merger. With approval from FERC and the Department of Justice in its pocket, Exelon needed only New Jersey’s approval to complete the deal. But it walked away after 19 months of negotiations with regulators, saying the state had demanded too much.

The two companies had offered to give New Jersey ratepayers $600 million in cash and credits against future rate increases for natural gas delivery. But the Board of Public Utilities sought $820 million and the sale of two generators in addition to the four that the Justice Department had required.

Because Atlantic City Electric is the smallest of the three utilities involved in the current deal, the former New Jersey regulator said, the state is unlikely to be central to the success of the deal.

Analysts at UBS Securities predicted the Maryland Public Service Commission will be the “key hurdle.”

“Given Pepco’s historic regulatory challenges, this is not likely to be an easy execution and integration story,” UBS said.

Good Riddance?

Pepco has had a prickly relationship with regulators in Maryland and D.C. because of complaints about frequent outages and long restoration times. Some say that could play in Exelon’s favor.

“Since Pepco doesn’t have the greatest reputation for being reliable, it may mean that people will be happy that they’re being taken over,” said the mergers attorney. “I think that will help. I know that Maryland has in the past been very concerned about competition issues and that’s not an issue here.”

Maryland People’s Counsel Paula M. Carmody said Pepco has improved its service since 2010.

“You do not hear, generally speaking, the level of outrage you heard a couple years ago,” she said. “On the other hand we haven’t had big storms since Sandy.”

Exelon said it is committed to continuing the improvements in system reliability, customer service and outage restoration that Pepco has made.

Utilities taken over by Exelon have improved customer satisfaction more quickly than similarly sized electric utilities, J.D. Power told The Washington Post. Among 17 large utilities in J.D. Power’s eastern region, BGE ranked 11th in customer satisfaction and Peco was sixth. Pepco was 16th.

In the district, Pepco’s service quality slipped drastically during a rate increase moratorium that was part of a settlement over the company’s sale of its generation, said D.C. People’s Counsel Sandra Mattavous-Frye.

“Pepco has become more sensitive [since]. I would not want to see a diminishment of the responsiveness,” she said. “You are going from a smaller, more localized entity to a really large conglomerate. [The question is] whether or not that new conglomerate will have an affinity with the local community.”

Local Impact

To address local concerns, Exelon said Pepco will continue its current level of charitable contributions for a decade, promising a total of $50 million. It will maintain the utilities’ headquarters in D.C., Newark, Del., and Atlantic City and a “significant employee presence” in the affected states, it said.

It’s also offering a $100 million “Customer Investment Fund” — about $50 per customer — for rate credits, low income assistance and energy-efficiency programs.

Still, the “synergies” Exelon sees from adding Pepco are certain to mean job cuts.

D.C. law also requires regulators and the counsel to take into account the economic impact on the district, and that means considering the plight of Pepco’s 3,200 employees there, Mattavous-Frye said. The impact on jobs versus the impact on rates is “a balancing issue for me,” she said.

Exelon Everywhere

Maryland’s Carmody noted that most of Maryland will be served by Exelon subsidiaries BGE and Pepco if the merger is approved. The only other providers would be Potomac Edison (no relation to Pepco), two cooperatives and a few municipal utilities.

Is that a problem? Carmody isn’t sure. “I don’t know what those implications might be.”

She said she pays little attention to the promises that accompany merger announcements.

“Whatever they say, it doesn’t matter,” she said. “We’ll do our usual discovery, depositions to see what’s there. Until we see the filing and start digging into it I can’t tell you what our issues are going to be.”

See related stories:

• Exelon: Pepco `The Right Deal at the Right Time’
• Pepco to Lose its PJM Voice; Consumers Lose Frequent Ally