Earlier this month, Mayor Bowser’s office announced a settlement with the executives of Exelon and Pepco that would allow their merger to proceed. However, the authority to approve or disapprove the settlement still resides with the DC Public Service Commission (PSC), which unanimously rejected the takeover in August of this year.
Attorneys for Exelon and Pepco have asked the PSC to consider the settlement agreement as part of the original case and adopt an expedited (150 days for the entire proceeding) schedule for a new takeover application.
The PSC could rule as soon as today on their request. (UPDATE: The PSC has agreed to an expedited review schedule. Read the Washington Post’s story.)
Andrea Molod, an ANC 3F commissioner, wrote previously about her opposition to the merger as laid out originally. She thinks an expedited schedule would limit the public’s voice in any future hearings on the takeover.
Here she writes about how she thinks the settlement comes up short.
Mayor Bowser’s press release says the new settlement addresses the objections of the PSC and benefits DC residents.
The press release, however, contains misleading statements (more on that below) and is selective in its review of the PSC’s original objections to the deal. The text of the settlement itself reveals some additional benefit to DC residents but leaves many of the original objections unaddressed such as:
- Deferred rate increases down the road
- Potential loss of DC jobs
- No advantage to philanthropy
- Increased regulatory burden
- No improvement in reliability of service
- Added financial risk to DC ratepayers due to nuclear holdings of Exelon
- No accountability for reaching DC-legislated Sustainability Goals
The takeover, therefore, is still a bad deal for DC residential and commercial ratepayers across all eight wards.
How we got here
In June 2014, Exelon Corporation and Pepco Holdings, Inc. filed their merger proposal with the DC Public Service Commission. During the next year of public hearings, closed hearings and negotiations and amendments of the original proposal, the public opposition to the takeover was clear, vocal and District-wide. Opposition was expressed by members of the DC Council (including Mary Cheh of Ward 3, Charles Allen of Ward 6 and at-large Council members David Grosso and Elissa Silverman), resolutions passed by 27 out of 42 Advisory Neighborhood Commissions, the Office of the People’s Counsel, the District government and many private citizens.
In August 2015, the PSC rejected the proposed takeover, articulating in a lengthy order and the executive summary that based on seven criteria required by their mandate the deal is “not in the public interest.”
The PSC order states that the deal has some elements that are beneficial, some that are neutral and some that do harm, but that in the end Exelon and Pepco had not met the burden of proof that the takeover “benefits the public rather than merely leaves it unharmed.”
Here, I present each of the PSC’s objections under the seven criteria, the responses within the mayor’s settlement with Exelon and Pepco, and my take on the problems that remain.
Impact on DC ratepayers
PSC objections: The primary direct benefit to ratepayers would come through a proposed Customer Investment Fund (CIF) of $33.7 million. Exelon and Pepco were offering a one-time rate credit of $114 dollars – OR the money would be used to support energy efficiency projects, OR it could provide energy assistance to low-income consumers. PSC thought the money allotted to this fund was too low and that a set percentage of savings from merger synergies should be allocated to the fund. The proposal also lacked specific provisions about how to allocate the CIF.
Other parties: The other parties to the case, including the District Government, also determined that the payments to customers would be quickly eroded, so a condition for approval must be a substantial increase in the CIF.
Testimony of the People’s Counsel estimated Pepco’s cost to deliver service as $6 million higher in the first year than if the merger did not take place. In effect, this puts the risk of whether savings from synergies would outweigh costs on the ratepayer.
Mayor’s settlement agreement: The amount going to the Consumer Investment Fund is increased to $78 million, and the language is explicit about how that amount will be disbursed, including:
Analysis: There is no guarantee of passing synergy savings to ratepayers since the cost of attaining these savings will be borne by District ratepayers.
Rates for low-income households
PSC objections: The takeover proposal did not include “new or incremental benefits for, or any specific provisions for assistance to, low-income customers in its application or its commitments.”
Other parties: One of the conditions included in many ANC resolutions called for a 50% rate reduction for low-income households over and above what is there now (Residential Aid Discount, RAD, typically $12 per month in summer, $6 per month in winter, and the Low-Income Home Energy Assistance Program, LIHEAP, of up to $1500 per year).
Mayor’s settlement agreement: Includes a contribution of $9 million to the LIHEAP fund, which amounts to covering one year’s worth of need (based on the LIHEAP records for 2015).
Analysis: The additional assistance for low-income households would disappear in a year and leave them substantially worse off after four years when the automatic rate increases are applied.
Impact on District employment
PSC objections: Exelon and Pepco promised zero net jobs loss for three years (based on hiring 257 employees to offset jobs lost due to the takeover) after the takeover. The PSC also objected to a lack of commitment of “best efforts” for the 102 new union hires to be District residents. Costs of the new hires would be borne by Pepco and could be used as the basis for future requests for rate increases.
Mayor’s settlement The “zero net jobs” promise is to last for 5 years. Exelon/Pepco commit $5.2 million for workforce development programs, which may offset some of the costs of training the new employees, deferring the costs of the new hires until 2017.
Analysis: The settlement makes no guarantees that the “replacement” jobs would be given to DC residents, and to the contrary, makes it clear that some of those jobs would be given to personnel relocating from Chicago.
The mayor’s press release, again, although correct technically, states that the settlement will “keep existing staff,” leaving out the detail that there will be offsetting job losses and gains, and no assurances that the gains will be in jobs for DC residents.
Based on the terms of the new settlement, the takeover will clearly result in a net loss of jobs to local employees and additional expenses to train their replacements, some of which will be borne ultimately by ratepayers.
Impact on local philanthropy
PSC objections: Exelon committed $1.6 million in charitable contributions, when Pepco’s charitable donations were $1.9 million in 2014.
Mayor’s settlement: The new settlement agreement calls for $1.9 million in charitable contributions over the next 10 years.
Analysis: This matches Pepco’s 2014 totals, but falls short of any increases in that amount that would naturally occur over the next 10 years if the takeover does not take place.
Impact on regulators
PSC Objections: One is that Pepco has no local presence under the deal. The PSC found that there were no commitments for current Pepco executives to be part of the Exelon management structure, or even part of Pepco’s board of directors. The PSC order made the point that this problem did not exist in the management of other Exelon-owned utilities. This objection was echoed by the Office of the People’s Counsel, who testified that it has “serious concerns with the ambiguity and lack of specificity” with regard to “several commitments [the Joint Applicants] claim will enable Pepco to maintain a local presence in the District.”
Another objection: The increased regulatory burden. The PSC found that “the Proposed Merger would make regulatory tasks more complex; more time consuming and more costly by increasing the need for regulatory oversight, reporting and auditing to ensure that Pepco and District ratepayers are being allocated the correct costs”. In other words, they objected to the expense and time associated with all the additional levels of corporate structure associated with the takeover, which they said would negatively impact the PSC’s ability to regulate Pepco.
Mayor’s settlement: Exelon agrees to a corporate presence in the District for 10 years, and to name of Pepco VP David Velasquez the Pepco chief executive officer. He would be given authority to decide rate cases. Exelon also agrees to submit to PSC jurisdiction [sic], and to file reports comparing Pepco’s performance to its other utilities (neither of which is any concession of substance). In addition, they agree that the PSC and the OPC would have access to Pepco’s corporate records, and “reasonable access” to accounting records of Exelon “that are the basis of charges to Pepco.”
Analysis: This language validates and does not address the PSC’s original finding that the takeover would result in a utility that is more difficult to regulate.
Impact on public safety and the safety and reliability of services
PSC objections: The takeover would leave the District “neutral” with respect to issues of reliability. They found that Exelon agreed to commit to the standards that Pepco has met, at the same fines schedule for not meeting them. The promise of a cost cap for attaining these standards has little meaning because of the exceptions to the cap for weather-related outages.
Mayor’s settlement: No changes are made to the original PSC order.
Impact on risk exposure
PSC objections: “Exelon’s ownership of additional nonjurisdictional business interests in general and its ownership of nuclear operations in particular, will have an impact on Pepco and could have a negative impact on District ratepayers” after a takeover. This negative impact could include an increased cost of capital for Pepco because of Exelon’s expenses. An Exelon witness acknowledged the adverse impact of nuclear decommissioning expenses. The PSC stated that the “ringfencing” measure may mitigate the risk but not remove it.
The PSC also had objections to the specifics of the ringfencing provisions designed to protect Pepco from direct costs related to Exelon’s nuclear and other operations. The corporate structure, they said, should dictate that the ringfencing measures should be more local, that the five-year period with no modification allowed is inadequate, and that whenever modifications are sought ought to have strict requirements.
Mayor’s settlement: Exelon agrees to additional levels of corporate structure to add to ringfencing protections, and at a more local level. Certain aspects of this corporate restructuring could only be changed with PSC approval (although there is no mention of the conditions under which this should happen). Also, some aspects of the corporate structure to be changed unilaterally with a 90-day notice to the PSC. Under a divestiture clause, Exelon could be ordered to divest of Pepco for “willful” disregard of the law, but the conditions for this divestiture would be difficult to demonstrate and would cost Pepco an amount “to compensate Exelon investors.”
Analysis: The PSC’s initial objections are not materially changed by the terms of the settlement agreement. There is clearly more financial risk after a takeover than before.
Competition in the local retail and wholesale energy markets
PSC objections: The PSC raised the issue that the takeover would raise the potential for conflicts of interest in the procurement of electricity, but found that the takeover would “leave wholesale electricity market unchanged” and there would be no benefit or loss as long as Pepco remains connected to the current wholesale electricity network.
Mayor’s settlement: Includes a provision that Pepco would not leave the current network and that any new (Exelon) generating facility seeking to join the network would have to undergo an independent engineering review.
Impact on conservation of natural resources and preservation of environmental quality
PSC objections: Exelon is completely unfamiliar with District laws and initiative regarding sustainability and renewables, and the takeover does not include any specific incremental improvements in Exelon’s or Pepco’s renewable energy efforts. According to the PSC, “Exelon has been less than enthusiastic about embracing distributed generation and has taken positions on net metering and community net metering programs that are contrary to programs that promote the use of renewable resources.”
Mayor’s settlement A statement of commitment by Exelon to be an “enthusiastic partner” in DC’s initiatives and laws regarding sustainability and renewables including the Mayor’s sustainability goals for 2032, and these additional provisions:
Analysis: The statements of commitment, although welcome, are not binding. In addition, except for the development of an additional five megawatts of solar energy, all of the other measures included in the settlement agreement are contingent on the approval of the rate increases needed to fund them. In essence, the additional terms in the settlement agreement are the five megawatts of new solar, which is of benefit to the District ratepayers. But the additional terms in the agreement fall woefully short of offsetting the PSC’s objections to the takeover’s impact on the District’s renewables initiatives to the call by many ANCs for Exelon to become a partner to plan for the grid innovations of the future.
Still “a bad deal for the District”
Although the settlement reached with Exelon by the mayor’s office addresses some of the objections of the PSC, the District government and the Office of the People’s Counsel, many important ones remain unaddressed. Little in the new settlement is binding, and, as determined by the PSC in August of this year, the takeover is still “not in the public interest” and a bad deal for the District.