A ma­jor util­ity merger could be short-cir­cuited by D.C.

A deal to make a mega-util­ity founders on lo­cal power strug­gles “Ex­elon and Pepco have tried like crazy to get the deal done”

Bloomberg Businessweek (Asia) - - CONTENTS - −Mark Che­diak and Brian Wing­field

Chicago-based en­ergy com­pany Ex­elon came to Wash­ing­ton in 2014 with a plan to cre­ate Amer­ica’s big­gest util­ity by ac­quir­ing Pepco Hold­ings, which pro­vides power to the District of Columbia and neigh­bor­ing parts of Mary­land, as well as ar­eas of Delaware and New Jersey. But the $6.8 bil­lion takeover has hit an un­ex­pected ob­sta­cle: a lo­cal fight over who gets to con­trol the $78 mil­lion Ex­elon and Pepco have of­fered to hand over as a deal sweet­ener. The dis­pute be­tween Mayor Muriel Bowser, a Demo­crat, and the lo­cal util­i­ties reg­u­la­tor, the District of Columbia Pub­lic Ser­vice Com­mis­sion, could kill the deal.

On March 7, Ex­elon, the big­gest U.S. nu­clear en­ergy op­er­a­tor, and Pepco in­tro­duced a last-ditch pro­posal that in­cluded a plan for meet­ing en­vi­ron­men­tal tar­gets and freez­ing res­i­den­tial rates un­til 2019. The com­pa­nies asked for a fi­nal de­ci­sion by April 7.

Ex­elon Chief Ex­ec­u­tive Of­fi­cer Chris Crane wants to add Pepco’s steady, reg­u­lated earn­ings to off­set losses at some of his com­pany’s nu­clear power plants. “We think this deal is the right deal at the right time for Ex­elon,” he said when he an­nounced the merger in 2014. Ex­elon and Pepco won

ap­proval from Delaware and New Jersey, and in Jan­uary they over­came a le­gal chal­lenge from Mary­land of­fi­cials, leav­ing the District the last re­main­ing hur­dle.

Lo­cal reg­u­la­tors ini­tially re­jected the merger in Au­gust, say­ing it wasn’t in the best in­ter­ests of ratepay­ers and could cur­tail the District’s ef­forts to use more re­new­able en­ergy. Six weeks later, Ex­elon and Pepco an­nounced a set­tle­ment with Bowser and other city rep­re­sen­ta­tives. The ar­range­ment in­cluded as­sis­tance for low-in­come cus­tomers and grants for green en­ergy projects.

In Fe­bru­ary the three-mem­ber util­i­ties com­mis­sion spurned that plan, say­ing it de­prived the com­mis­sion of its abil­ity to de­ter­mine how the money should be al­lo­cated. It put forth an al­ter­na­tive that didn’t guar­an­tee a res­i­den­tial rate freeze, which the mayor’s of­fice and other city of­fi­cials promptly re­jected. “If this thing gets scut­tled, it’ll be scut­tled for per­haps th­ese rea­sons of who gets to con­trol what money,” says D.C. Coun­cilmem­ber Mary Cheh, a Demo­crat who rep­re­sents neigh­bor­hoods in the city’s northwest quad­rant. She op­poses the merger, which she thinks could raise rates.

The District’s con­sumer ad­vo­cate, Peo­ple’s Coun­sel San­dra Mat­tavous-Frye, said on March 11 that she wouldn’t ac­cept the com­pany’s most re­cent of­fer. D.C.’s at­tor­ney gen­eral, who rep­re­sents the mayor’s of­fice, also re­jected it. Com­mis­sion spokes­woman Kel­lie Arm­stead Didigu de­clined to com­ment on the pro­posal. Ex­elon and Pepco said in a joint state­ment they still hope a so­lu­tion can be worked out. “Ex­elon and Pepco have tried like crazy to get the deal done,” says Paul Rid­zon, an an­a­lyst for Key­Banc, a Cleve­land-based in­vest­ment bank. “But when you get politi­cians in­volved, I try not to hand­i­cap it.”

The bot­tom line D.C. of­fi­cials are on the verge of block­ing a $6.8 bil­lion merger be­tween Ex­elon and Pepco that would cre­ate the largest U.S. util­ity.

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