Exelon and Pepco told the Federal Energy Regulatory Commission last week that competitive and environmental concerns raised by the Independent Market Monitor and others over their proposed merger are unfounded, reiterating their request for FERC approval by Aug. 30.

“None of the objections to the transaction has any merit, and the commission should approve it without conducting an evidentiary hearing or imposing additional conditions,” the companies said in a July 30 filing (EC14-96).

Although the transaction will not substantially increase Exelon’s generation portfolio — Pepco owns only 17 MW — commenters have told FERC the pairing threatens to hurt competition, the health of the Chesapeake Bay, prospects for renewable energy and the PJM stakeholder process.

Commenters also asked FERC to ensure that costs of the transaction are not passed on to transmission customers and to strengthen provisions to prevent cross-subsidization among Exelon’s subsidiaries.

Competitive Concerns

The IMM said FERC should require the companies to provide more information and impose behavioral mitigation to address “potential vertical and horizontal market power issues.”

The Monitor said that Exelon’s ownership of the intrastate natural gas distribution systems of PECO Energy and Baltimore Gas and Electric, combined with the gas assets of Pepco’s Delmarva Power & Light unit, raise concern over gas-fired generators’ access to fuel.

Julie Solomon of Navigant Consulting, who evaluated the competitive impact of the merger on behalf of the applicants, said that new gas-fired generators will likely connect directly to interstate pipelines and bypass Exelon’s local distribution companies (LDCs).

But the IMM said the application did not discuss the state rules for such bypass arrangements and whether LDCs can impose charges or other conditions on generators seeking service directly from an interstate pipeline.

The Delaware Public Service Commission said Exelon and Pepco’s LDCs have the potential to favor their generation affiliates “especially during periods when interstate natural gas pipelines in the Mid-Atlantic are severely constrained,” because they hold gas storage entitlements and firm transportation contracts on interstate pipelines.

Exelon and Pepco said their combination will hold 6% of the interstate pipeline capacity in PJM and 7-8% of the capacity in the AP South region and the 5004/5005 submarket in Maryland. Their share of natural gas storage in PJM will be about 2.5%.

The Delaware PSC also said the companies should demonstrate that they cannot use their LDCs’ pipeline capacity entitlements to raise delivered natural gas prices “and, consequently, electricity prices to the advantage of their generation affiliates.”

Exelon said that because it already owns BGE and PECO, “the only potential vertical market power concern” raised by the merger relates to Pepco’s Delmarva affiliate, “which does not serve any natural gas-fired generation from its local distribution facilities.”

“Certainly the Delaware PSC can make no claim that any of the applicants have ever improperly withheld gas transportation capacity or that the transaction in any way would facilitate the improper withholding of such capacity,” the applicants said.

Exelon Transmission Concentration

The IMM said that the increased ownership of transmission is also a concern and that the applicants overstated PJM’s control over their assets. The merger would give Exelon nearly one-quarter of the PJM transmission network, adding Pepco’s transmission, which accounts for 6.6% of PJM transmission service credits, to Exelon’s current 16.8%.

The IMM also said FERC should consider the impact of the merger on competition among transmission developers under FERC Order 1000.

Transmission owners can determine “the timeliness, the technical requirements for and the costs of” interconnections and set the line limits used by the RTO in their network models, the IMM said.

Exelon “will have substantial and increased influence over decisions that directly relate to competition in PJM among developers of transmission projects. Although the RTO has responsibility for the interconnection process, transmission owners perform interconnection studies for generation. Having a transmission owner involved in the study process creates a conflict of interest if they are also the developer or potential developer of a project or own competing generation,” the IMM said.

The IMM said FERC could address its concerns through behavioral mitigation, such as ordering independent interconnection studies and a process for reviewing and updating transmission limits.

Exelon said the IMM’s concern is “purely hypothetical [and] completely unsupported by any data or other evidence.”

It said its market power is mitigated by both its membership in PJM and FERC’s requirement that all transmission providers operate under the competitive protections of an Open Access Transmission Tariff.

Impact on Transmission Rates

The Southern Maryland Electric Cooperative (SMECO) and the Delaware Municipal Electric Corp. said FERC should prohibit Exelon from recovering its “acquisition premium” — the 25% difference between Pepco’s stock market value and Exelon’s purchase price — through wholesale transmission rates.

SMECO, which depends on seven interconnections with Pepco to supply its members, said that while Exelon promised not to seek recovery of the premium through retail rates, it made no such commitment to wholesale transmission customers. SMECO said FERC should insist Exelon’s promise to hold transmission customers harmless for five years applies to both the acquisition premium and transaction costs.

It also called for revisions to Pepco’s existing formula transmission rate to improve transparency and ensure customers have the information needed to review and challenge future rate-increase requests.

Exelon said it should not be prohibited from recovering merger-related costs if they are offset by merger-related savings. The applicants said FERC lacks jurisdiction to require changes to formula-rate protocols in the merger proceeding. “Such changes to an existing rate schedule may be ordered only in connection with a Section 206 complaint,” the company said.

Cross Subsidization

In their May 30 application to FERC, Exelon and Pepco said that “because of the de minimis nature of the competitive overlap,” the commission should be able to approve the transaction within 90 days.

The Delaware Municipal Electric Corp. said FERC should reject the applicants’ request for an expedited ruling, noting that state regulators have not yet examined the adequacy of the “ring-fencing” measures to address cross subsidization.

The D.C. Office of the People’s Counsel said the financial and geographical size of the merged company raises questions of “whether any one state regulatory body will be able to regulate the local utility subject to its jurisdiction.” The post-merger company would have regulated utilities in Illinois, Pennsylvania, Maryland, Delaware, New Jersey and D.C.

Exelon responded that the merger satisfies the commission’s cross-subsidization standards so that “no particular ring-fencing should be required.”

Environmental Concerns

The Clean Chesapeake Coalition, a group of nine northern and eastern Maryland counties, complained that Exelon — whose post-merger service territory would surround the Chesapeake Bay and its tributaries — has displayed a “lack of environmental due diligence.”

The coalition wants Exelon to do more to prevent sediment trapped by the dam at the Conowingo Hydroelectric Project from being released into the Chesapeake during storms.

The counties said they approached Exelon to express their concerns — at FERC’s direction — after attempting to intervene in the relicensing of the dam. They said that the company has not responded after more than three months. “Such disregard of local government concerns [is] an affront to the public interest,” the coalition said.

The Institute for Energy and Environmental Research and the Nuclear Information and Resource Service, two Maryland-based environmental groups, said the merger will increase Exelon’s influence in public policy debates over the merits of nuclear power versus renewables. Exelon would increase its share of residential electric distribution customers from 50% to 80% in Maryland while adding virtually all D.C. residents.

Exelon has been seeking additional compensation for the carbon-free generation of its nuclear fleet. The environmental organizations said this pits Exelon’s interests against those who support more renewables. The groups cited Environmental Protection Agency estimates that reducing carbon emissions through renewable portfolio standards costs $3 per metric ton while subsidizing “at-risk nuclear units” would be $12 to $17 per metric ton.

“If corporate money is free speech, as the Supreme Court has ruled, then FERC is obliged to consider the effect of increasing Exelon’s ability to speak in the political arena that the merger would cause,” the groups said.

Exelon said the environmental claims are “irrelevant to the commission’s review” of the merger.

PJM Influence

The IMM, Delaware PSC and D.C. Office of the People’s Counsel complained that the merger could give Exelon undue influence in the PJM stakeholder process.

Having divested its generation, Pepco has more in common with transmission-only cooperatives than generation owners such as Exelon; Pepco representative Gloria Godson has often sided with load against supply in PJM debates. (See Pepco to Lose its PJM Voice; Consumers Lose Frequent Ally.)

“The potential for the elimination of [Pepco]’s independent voice in the PJM stakeholder process should give this commission serious pause,” the DC Office of the People’s Counsel said.

The Delaware PSC noted that Exelon is a member of the Electric Power Supply Association (EPSA), the plaintiff in the lawsuit that resulted in an appellate court voiding FERC’s authority over compensation for demand response. “Exelon’s support for that outcome is not in line with consumer interests,” the Delaware regulators said.

The IMM said that “transmission owners have significant leverage” over RTOs and noted that Exelon’s participation in PJM is voluntary.

“Like any organization, RTOs are concerned with protecting their size, scope and importance. The exit of a transmission member would be a very significant negative for an RTO,” the IMM said. “The greater the proportion of the RTO’s assets represented by the transmission owner, the greater the threat of exit to the RTO and the greater the potential influence of the transmission owner over the RTO governance and processes.”

Exelon said the claims are irrelevant and incorrect.

Pepco and Exelon each have one vote in PJM’s top two stakeholder bodies, the Members Committee and Markets and Reliability Committee — Pepco in the Electric Distributor sector and Exelon in the Transmission Owner sector. Post-merger, Exelon will have only one vote in the 14-member TO sector.

“Consequently, far from increasing Exelon’s influence in the stakeholder process, the transaction will reduce by one vote the influence the merged company will have,” Exelon said.