Exelon’s proposed acquisition of Pepco: Corporate strategy at ratepayer expense

In a move aimed at shoring up its faltering business model, Chicago-based Exelon Corp. in April 2014 proposed acquiring Pepco Holdings Inc., the utility holding company that provides electricity to Washington, D.C. and parts of Maryland, Delaware, and New Jersey.

Exelon, the largest owner of nuclear power plants in the United States and one of the largest electric utilities in the country, has been challenged in recent years by low wholesale power prices driven by cheap natural gas, reduced demand for power, and the growth of renewable energy and energy efficiency. The company’s stock price has dropped, its dividend has been reduced, its credit ratings are stagnant, and it faces a worrisome outlook based on rising nuclear power costs from aging plants.

By contrast, Pepco’s regulated distribution companies earn steady revenues through the rates charged to electricity customers for the delivery of electricity to homes and businesses. These rates are guaranteed by public service commissions with jurisdiction over wherever Pepco does business.

Exelon has proposed paying $6.4 billion—a price that includes an acquisition premium of $2.5 billion over and above the value of Pepco’s assets—to acquire Pepco. If the deal goes through, Exelon would acquire a stable earnings stream from Pepco’s regulated utilities that would help Exelon balance out the volatility of its merchant electricity generation business, which has proven susceptible to weakness in the competitive energy markets.

Pepco’s customers, on the other hand, will face the risk that Exelon will seek rate increases to boost its regulated earnings. The high price to be paid for Pepco also increases the risk of rate increases, as there will be pressure on Exelon to extract as much value as possible from the acquisition to justify the premium. A merger with Exelon would also subject ratepayers to risks associated with Exelon’s aging nuclear fleet. Residents and businesses may be asked to accept rate increases and policy accommodations to assist Exelon with the management of aging nuclear plants.

Washington, D.C. has developed renewable energy and sustainability goals. The District needs a utility that is a partner in this undertaking. Exelon’s heavy reliance on nuclear power in the mid-Atlantic region means the company would probably oppose public policies that run counter to the interests of maintaining the profitability of those plants. Moreover, Exelon has historically opposed policies to support the development of renewable energy. As a result, the proposed acquisition of Pepco will likely make it more difficult for the District to reach its renewable energy and sustainability goals.

Although Exelon has promised public benefits from the merger—including establishment of a $14 million Customer Investment Fund for Washington, D.C. —its promises do not mitigate the long-term risk to Pepco customers.

The proposed Exelon-Pepco merger would:

• Expose residents and businesses to rate increases aimed at supporting Exelon’s struggling business model
• Undermine the District of Columbia’s renewable-energy initiatives
• Expose Pepco customers to long-term risks significantly larger than the short-term protections and public benefits claimed by Exelon

The merger should be rejected.

Press release: Corporate Strategy at the Expense of D.C. Ratepayers: Exelon’s Proposed Acquisition of Pepco Holdings

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