By Suzanne Herel

Exelon closed its $6.8 billion acquisition of Pepco Holdings Inc. on Wednesday, after the D.C. Public Service Commission approved the merger 2-1 on terms it crafted itself.

Two years in the making, the deal will rank Exelon as the largest utility in the country by number of gas and electricity customers.

Pepco shares gained $5.71 (27%) to $26.95 on the news, while Exelon shares lost 28 cents (-0.8%). Pepco stockholders will receive $27.25/share in the deal. PHI’s common stock was removed from the New York Stock Exchange on Thursday.

Pepco’s three operating companies will retain their local headquarters: Atlantic City Electric in Mays Landing, N.J.; Delmarva Power in Newark, Del.; and Potomac Electric Power Co. in D.C.

D.C. also won additional concessions: Exelon will move the offices of the CFO and the chief strategy officer to the district along with that of Pepco Energy Services, which is now in Arlington, Va. David Velazquez will assume the role of president and CEO of PHI, a post previously held by Joseph Rigby, who is retiring.

“Today, we join together as one company to play a vital role as a leader in our industry and the mid-Atlantic region,” Exelon CEO Chris Crane said in a statement. “We’ve made a number of commitments to customers in all of the Pepco Holdings utilities’ jurisdictions — the district, Maryland, Delaware and New Jersey — and we look forward to getting to work to deliver those benefits to our customers and communities.”

An Exelon spokesman said the D.C. agreement triggers the “most favored nation” clauses in the other states’ contracts, and it will be returning to those state regulators to “true up” benefits.

So far, Exelon has committed $430 million for ratepayer credits, reliability improvements and other investments for customers in Pepco’s service territories.

DC PSC Lifeline

Many had expected the deal to fail, after the most recent proposal by Exelon and Pepco was rejected by all but three of the other settling parties.

The companies on March 7 asked the commission to consider three options: Revisit its rejection of the settlement agreement brokered by the administration of Mayor Muriel Bowser; adopt the revised proposal by Commissioner Joanne Doddy Fort; or accept a third alternative that would give the PSC more latitude in how to spend money from the $72.8 million customer investment fund on rate relief. (See Exelon-Pepco Deal Doubtful as DC Officials Reject Alternatives.)

Fort and Commissioner Willie Phillips voted to approve the second option; Chairwoman Betty Ann Kane dissented.

Fort’s proposal took Bowser’s deal and added changes regarding the use of the CIF, the development of a 5-MW solar generation facility at the Blue Plains Advanced Wastewater Treatment Plant and the role of Pepco in establishing public-purpose microgrids.

The Bowser-brokered deal had earmarked money from the CIF for a handful of D.C. groups, including the Sustainable Energy Trust Fund, the District of Columbia Consumer and Regulatory Affairs Green Building Fund and the Low Income Home Energy Assistance Program.

The PSC’s counteroffer takes those funds, totaling $32.8 million, and places them in an escrow account to pay for projects to modernize the district’s energy system and for energy efficiency and energy conservation initiatives focused on housing for low- and limited-income residents. The PSC would have authority over the funds’ disbursement.

In her dissenting opinion, Kane said that developments in the record since she voted to oppose the Bowser settlement in February “give me even stronger reasons to find that the takeover of the district’s electric distribution company by a multi-faceted, vertically integrated, generation-focused holding company … benefits Pepco and Exelon shareholders but does not provide sustainable benefits to district ratepayers, places Pepco within a structure that is contrary to district law and policy and should be rejected.”

Unlike a rate case, she said, the sale of Pepco can’t be reviewed again. “It is gone forever,” she said. “The stated motive of the sellers is to increase PHI shareholder value. The motive of the buyer is to add regulated revenue to prop up Exelon’s failure to pay dividends to its shareholders. However, the needs of Pepco’s customers and the district are for a safe, reliable, modern electricity delivery distribution system at a just and reasonable cost.”

In their order, Fort and Phillips said Exelon’s first option identified no error of law or fact that would warrant a reconsideration of its rejection of the settlement negotiated by Bowser’s office.

It found the third alternative unacceptable for three reasons: It would allocate a $25.6 million base rate credit solely to residential and apartment customers; there was not enough information to determine the implications of the proposed base rate credits; and the shift of funding to rate credits would come at the expense of projects that would make the grid better able to accommodate distributed energy resources.

In offering the settling parties the retooled agreement, the commission already had judged it to be in the public interest.

Fort and Phillips said their revised settlement ensures that the district receives the $72.8 million CIF, which will be used for rate relief, energy conservation programs and projects to modernize the distribution grid and enable it to accept more distributed resources, “thereby further promoting the district’s sustainability agenda.”

“These are all funds that will not be available to district ratepayers or the district if the merger is not approved,” they said, adding that the changes made to the Bowser settlement “ensure that the district’s market remains a competitive one for suppliers who want to bring more renewable energy resources to our city while still requiring Exelon to invest in 7 MW of new solar in the district and 100 MW of new wind” in PJM.

Disappointment and Surprise

Power DC, a coalition formed against the deal, said, “We are profoundly disappointed and saddened that the D.C. Public Service Commission has ignored the clear opposition to the proposed Exelon-Pepco merger voiced by the district’s elected officials, community and business leaders, and residents.

“By approving the merger, the PSC has exposed our city to decades of higher rates, weakened its own ability to guide our city’s energy future and helped ensure that D.C. will fall behind the rest of the U.S. on clean, efficient energy.”

“I don’t think we’re surprised” at the ruling, said Williams Fields, senior assistant in the Maryland Office of People’s Counsel, which has appealed the Maryland Public Service Commission’s earlier approval of the deal. “It’s been down a long path. We haven’t read the ruling yet. We will have to evaluate on how it impacts Maryland in regards to additional funding from our most-favored-nation status. And, of course, we will have to see how it affects our appeal.”

Montgomery County, Md., Councilman Roger Berliner, who had campaigned against the merger, said in a statement that the merger approval was “deeply disappointing.”

“Its approval now means that Exelon will totally dominate the Maryland market,” he said. “Environmental and consumer interests were needlessly sacrificed. The only winners are Pepco shareholders and Exelon’s bottom line, a bottom line that has been hammered by its huge investment in nuclear power.”

David Bonar, Delaware’s Public Advocate, said he was “pleasantly surprised.”

“I’m glad to see that it is finally resolved. Each jurisdiction has its own idiosyncrasies and partners who have a right to input, and I’m glad they all had an opportunity to add their input,” he said.

“I think the [D.C.] PSC made the right decision. Now, we have to figure out exactly what it means to us in regards to additional funding. It will come out to several millions of dollars. I certainly hope we can give energy users some long-term benefits, like meaningful energy efficiency programs.”

The Apartment and Office Building Association of Metropolitan Washington was the only settling party to file its support of the commission’s revised proposal.

Those opposing it were the National Consumer Law Center, National Housing Trust and National Housing Trust-Enterprise Preservation Corp., the D.C. Office of the People’s Counsel, the Bowser administration and the D.C. Water and Sewer Authority.

They took issue with the PSC’s requirement that $25.6 million of the CIF earmarked for residential rate relief be held in escrow until the next Pepco rate case and then be considered for disbursement, including to nonresidential customers.

“Despite the commission’s perplexing approval of a proposal that OPC and most of the other settling parties rejected, the Office of the People’s Counsel is fully prepared to continue to aggressively advocate for ratepayers and fight to ensure that rates remain affordable for consumers, particularly for our most economically vulnerable residents,” People’s Counsel Sandra Mattavous-Frye said.

The NCLC and the NHT were the only settling parties to voice support for the companies’ third alternative.

“Should option three be rejected, the merger is likely to collapse,” they said. “From the perspective of NCL/NHT, this is contrary to the public interest and particularly contrary to the interests of low-income households in the district.”

The General Services Administration, the largest consumer of electricity in the district, had not signed on to the settlement negotiated by Bowser but had voiced concern that the included rate relief would not be disbursed to non-residential customers. It initially supported the commission’s revised proposal, which addressed that issue, but on March 17 filed comments urging the PSC to reject Exelon’s filing.

Exelon has spent an estimated $259 million over the past two years trying to capture Pepco’s $7 billion rate base.

Ted Caddell contributed to this article.