By Michael Brooks, Suzanne Herel and Ted Caddell

WASHINGTON — The D.C. Public Service Commission last week unanimously denied Exelon’s proposed $6.8 billion acquisition of Pepco Holdings Inc., sparking applause in the hearing room and sending PHI shares tumbling on Wall Street.

“When this proposed merger is considered as a whole … we conclude that the joint applicants have not met their burden of persuading this commission that the proposed merger is in the public interest,” the three-member PSC said.

Upon the news, PHI shares dropped more than 18%, and Exelon stock dipped more than 3%.

In a joint statement, Exelon and PHI said, “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. 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.”

Exelon and PHI have 30 days to ask the commission to reconsider its 181-page order. The companies on Monday released a joint statement, saying they would continue working to complete the merger.

“We remain convinced the decision fails to recognize the substantial immediate and long-term benefits of our merger proposal to citizens, businesses and communities in the District of Columbia,” the companies said. “We want to deliver these benefits to customers and will strive to make that happen.”

Some analysts, however, are pessimistic about the deal succeeding. “While none of the negative items cited by the PSC in their order are glaring hurdles that could not be overcome, the magnitude of ‘small cuts’ appears in our view to suggest a deeper mistrust between the commission and Exelon,” UBS Global Research said.

Following their initial fall, the companies’ stock prices remained steady over the week, and Monday’s statement did little amid another bad day on Wall Street: Exelon closed at $30.75/share, down 2% on the day, while Pepco closed at $22.98/share, a less than 1% drop.

7 Factors of Public Interest

The PSC called the rejection “one of the most significant decisions” it would ever make, noting, “This proceeding has generated more interest and more active participation by parties and interested persons than any other proceeding in the commission’s more than a century of operations.”

The commission said it weighed the proposal on seven factors of public interest, among them the effects on ratepayers and shareholders, market competition and preservation of natural resources and the environment.

“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,” Chairwoman Betty Ann Kane said. “The evidence in the record is that the sale and change in control proposed in the merger would move us in the opposite direction.”

Commissioner Joanne Doddy Fort concurred, saying, “The proposed merger would diminish Pepco’s ability to directly raise issues that address the needs of district ratepayers.”

Commissioner Willie Phillips voted to reject the merger application, but he dissented in a secondary vote to issue the actual order.

He agreed the proposed merger was a “bad deal” for the district, but said, “I am disappointed in the loss of the many opportunities inherent in the proposed merger that could have achieved benefits — tangible benefits — for our local communities and across the region.”

Surprise: Md. Wasn’t Biggest Obstacle

When Exelon proposed the deal 16 months ago, analysts predicted Maryland would be its biggest stumbling block. But after months of securing strategic alliances, Exelon won that commission’s 3-2 approval — albeit with 46 conditions. (See How Exelon Won Over Maryland.)

Meanwhile, in the district, opposition steadily stiffened. More than half of the Advisory Neighborhood Commissions and nearly half of the 12-member City Council opposed the deal. The Office of People’s Counsel and the attorney general’s office also advised against approval without significant concessions. (See Deadline Looms for Decisions in Exelon-Pepco Deal.)

As Kane read the commission’s summary of the order, there was a murmur in the room, as those attending the meeting realized that the commission was siding against the merger.

Many in attendance said they were surprised by the ruling, as they were prepared for the commission to approve the deal with concessions similar to other jurisdictions, such as Maryland.

“Honestly, I was pleasantly shocked. I commend them for their courageousness,” People’s Counsel Sandra Mattavous-Frye said of the commissioners. “It will have a domino effect on the entire proposal. The joint applicants have said they cannot go forward without D.C.

“The commission listened to the parties and, more importantly, they looked at the record,” she said, noting, “The applicants had the opportunity to supplement the record. They, too, heard the concerns being raised and chose not to address them.”

“I’m stunned,” said Anya Schoolman, executive director of DC Solar United Neighborhoods, a local solar power advocacy group. “I think … the commonly accepted wisdom was that they would approve it with conditions. And we were waiting to see how stringent those conditions would be.”

“I would almost go to say I’m shocked, because I fully expected that … the commission could have possibly come out in favor of the merger,” said D.C. Councilwoman Mary Cheh, who led the opposition in the district’s legislature.

“I’m just happy for the people of the District of Columbia,” she said. “The real beneficiaries of this, had this gone through, would have been the officers and the shareholders of Pepco and Exelon Corp. The people who would have been harmed are the ratepayers.”

“It was somewhat of a shocker that all other jurisdictions did in fact support this merger,” said D.C. Councilman Vincent Orange, who said he has remained neutral throughout the process. “At the end of the day, the Public Service Commission has ruled, and we’ll have to live with it and move on.”

‘David and Goliath’ Win

Power DC, which had organized opposition, said it was glad the PSC had “followed the will of the district’s electric customers.”

“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.

“Pepco has always affirmed its capability to provide a high level of service for its customers without this merger, and it has demonstrated a much greater willingness than Exelon to integrate new, customer-centered technologies.”

Mattavous-Frye called the win a “David and Goliath” scenario.

“I want to commend the public participation,” she said. “This was about consumer empowerment. People did not think their participation would be meaningful, and it is.”

Other Jurisdictions Approved Deal

The deal had been more than a year in the making. All of the other affected jurisdictions had approved it: Virginia, Maryland, Delaware, New Jersey and FERC.

Dave Bonar, Delaware’s Public Advocate, said the decision was a disappointment, but that it “doesn’t mean the deal is not salvageable.”

“They could appeal, or they could make more concessions,” he said. “Or they could just fold their tent and go back to Chicago.”

He said those who worked on getting Exelon’s concessions and reaching consensus were “disappointed.”

“We worked very hard to get this done,” Bonar said.

Critics in Md. Pleased

Mike Tidwell, director of the Chesapeake Climate Action Network, a group that intervened before the PSC in Maryland against the proposed merger, called the decision a “major victory” for the growth of clean energy across the region.

“One good idea that emerged from the proposed Exelon-Pepco (merger) was to create a PSC-guided process to explore ‘performance-based ratemaking.’ Utilities should be rewarded based on how well they perform on energy improvements that enhance our economy and reduce carbon emissions and climate change,” he said. “Hopefully, we can now move on to these solutions.”

Paula M. Carmody, People’s Counsel for the State of Maryland, had urged the state commission to reject the deal.

Last week, she said of its D.C. counterpart, “I think they got it right.

“They hit on the very issues identified in the proceeding before the Maryland commission,” she said, noting that the D.C. group had concerns about the “loss of local influence” over a utility with headquarters in Chicago.

Carmody, whose organization has one of three appeals pending before the Maryland commission, said she is not sure if the district’s decision is a death knell for the merger, “but clearly they can’t close” the deal as it stands now.

“It depends on what the companies do now,” she said. “They could appeal, they could file for reconsideration.” But, she said, the rejection makes the acquisition “problematic.”

A Win for Consumers, Environment

Roger Berliner, an attorney and Montgomery County councilman who had led that area’s opposition, applauded the D.C. PSC for standing up for consumers and the environment.

“As the testimony of countless expert witnesses made clear, Exelon has shown time and time again its interest in favoring its own nuclear generation holdings over renewable technologies like solar and wind, and the merger does far too little to provide benefits to ratepayers, while Pepco’s shareholders stand to benefit tremendously.”

The acquisition would have created the Mid-Atlantic’s largest electric and gas utility — and the country’s largest utility by customer count. Exelon has said the deal would boost its customer base to nearly 9.8 million from 7.8 million and increase its rate base to almost $26 billion from $19 billion.