Climate

After 4 States Approved A Big Utility Merger, DC Shocked Everyone By Denying It Over Clean Energy

CREDIT: AP Photo/Jacquelyn Martin

Kenny Nails, working for Pepco, fixes downed wires in 2010.

In a move that shocked both industry observers and grassroots clean energy advocates, the Public Service Commission of Washington, D.C. unanimously rejected a proposed merger between Exelon and Pepco. Together, they would have created the nation’s largest utility.

The commission wrote in its official summary, released Tuesday, that Exelon and Pepco “have not met their burden of persuading this Commission that the Proposed Merger is in the public interest.”

Why? The summary listed several points but a central conflict was over how renewable energy would fare.

“We are also concerned about the inherent conflict of interest that might inhibit our local distribution company from moving forward to embrace a cleaner and greener environment,” the Commission wrote in its summary.

“Therefore, the application is denied,” the summary concluded.

The merger, valued at $6.4 billion, would have resulted in Chicago-based, nuclear-heavy utility giant Exelon buying Pepco Holdings, which provides power to Washington, D.C. and parts of Virginia, Maryland, Delaware, and New Jersey.

Exelon and Pepco’s joint statement said they were “disappointed” with the decision, believing “it fails to recognize the benefits of the merger to the District of Columbia and its residents and businesses.” The utilities made the case that a merger would benefit customers and enhance reliability.

“We will review our options with respect to this decision and will respond once that process is complete,” the statement concluded.

“The public policy of the District is that the local electric company should focus solely on providing safe, reliable and affordable distribution service to District residences, businesses and institutions,” Betty Ann Kane, the commission chairman, said in her statement announcing the decision. “The evidence in the record is that sale and change in control proposed in the merger would move us in the opposite direction.”

Exelon and Pepco have 30 days to ask the Public Service Commission (PSC) to reconsider the denial, and it is likely they will do so, according to Gabe Elsner, executive director of the Energy & Policy Institute in Washington, D.C.

The normally boring debate about a utility merger became a pitched battle between residents concerned about electricity rates and renewable energy advocates on one side, and the two utilities and their allies on the other. Nuclear plants provide most of Exelon’s power generation, followed by natural gas, oil, hydro, wind, and coal. Yet it is the utility’s past fights against state renewable energy policies that caused so many people to oppose the idea of Exelon purchasing Pepco.

“Exelon has a long history of using the company’s political influence to restrict renewable energy policies,” Elsner told ThinkProgress. “If the D.C. PSC had approved the merger, Exelon would have been empowered to continue its anti-renewable campaign, but the PSC’s rejection of the merger could help ensure that these two states’ renewable energy policies remain in place and continue to support the growth of renewable energy industry in D.C. and Maryland.”

Exelon fought hard against the renewal of the Wind Production Tax Credit at the national level because it would affect the bottom lines of their nuclear plants.

Local renewable advocates saw this decision as a line in the sand.

“Utilities that work to impede people’s desire to produce their own clean energy do so at their peril,” said Anya Schoolman, founder and executive director of the nonprofit Community Power Network. Schoolman called the PSC’s decision “a great victory for renewable energy” and played a central role in the fight to halt the merger. Her fight for neighborhood solar power access began several years ago when she and several neighbors found the process to install solar panels too complicated, and eventually founded an advocacy organization called D.C. Solar United Neighborhoods. She was honored at the White House last year as a “Champion of Change.”

“D.C. Solar United Neighborhoods fought hard because of Exelon’s well documented opposition to locally owned renewable energy, their opposition to wind, and their hypocritical track record to oppose policies that support renewable energy in the name of the ‘free market’ while asking for handout after handout for their nuclear business,” she told ThinkProgress. “Fundamentally, we argued, and the D.C. PSC agreed, that there was a conflict of interest between Exelon’s generation business and D.C.’s goals to build a modern, equitable, renewable, clean grid.”

The PSC seemed fully aware of the importance of the decision, and how much attention it would receive.

“This proceeding has generated more interest and more active participation by parties and interested persons than any other proceeding in the Commission’s more than a century of operations,” the PSC’s summary stated. “As we have been reminded throughout this process, this decision is one of the most significant decisions that the Commission will ever make.”

D.C.’s laws and statutes place obligations on the Commission that include determining whether the deal was in the public interest — and unlike some states, one of those factors is “conservation of natural resources and preservation of environmental quality.” This was certainly part of the PSC’s ultimate decision.

“In this proceeding,” the summary stated, “the Commission must decide who will control the District’s only local electric distribution company at a time when our city’s leadership, at the urging of many residents, has mandated that the District must pursue a cleaner and greener future that includes more renewable energy resources and more distributed generation and at a time when the electric industry is undergoing significant transformation.”

Because Pepco is an energy distribution company, and Exelon receives most of its revenue from energy generation, the PSC noted that this could cause a conflict with adverse consequences to D.C. ratepayers.

Despite generating no power on its own, Pepco is not exactly a national leader in renewable energy either. A recent study found that the distribution-focused utility was the worst in the country in connecting its residents to solar power. Advocates worried that Pepco becoming a subsidiary to a much larger utility that gets most of its revenue from generation would complicate efforts to generate more power from distributed renewable energy.

Pepco and Exelon have both made the case that the merger would have brought lower electricity rates to the District, but the PSC found little benefit for ratepayers, especially without Pepco representation on Exelon’s executive committee.

District officials, despite several council members’ close relationships with Pepco, had largely opposed the merger. This includes Mayor Muriel Bowser — earlier this year after a letter from the D.C. Attorney General’s office argued that the benefits of the merger would flow from D.C. ratepayers to shareholders in the Chicago-based company, Bowser said the letter spoke for the District.

The long march to Tuesday’s rejection seemed almost certain to result in an approval, after PSCs in Virginia, New Jersey, Delaware, and finally Maryland approved the merger.

“It was a fascinating process, that’s for sure,” Mike Tidwell, director of the Chesapeake Climate Action Network, told ThinkProgress. Tidwell said that Exelon wanted the merger “to prop up its nuclear fleet on the backs of low-carbon generation in the Mid-Atlantic.”

The Maryland Public Service Commission was supposed to be the wrench that stopped the otherwise smoothly-running gears of the merger process. Martin O’Malley, as governor, helped lead the fight against it while still in office. Tidwell noted that “O’Malley basically said ‘hell no.'” Even when his chosen successor lost to Republican Gov. Larry Hogan, Hogan defied expectations that the new administration would clear the way for the merger. Hogan stayed fairly neutral. The opposition of the Maryland Attorney General, the staff of the PSC, the environmental groups all suggested that Maryland may actually reject the merger.

Instead, the Maryland PSC voted 3-2 to approve it in May.

“The two commissioners who opposed it wrote a scathing letter to the majority, saying verbatim ‘we find the majority’s decision incomprehensible,'” Tidwell said. But he noted that that narrow decision may have helped to set the stage for D.C. to reject it.

Consumer and renewable energy advocates in D.C. did not have high hopes, however, because of the clout utilities have and the revolving door nature of the close ties local officials have with Pepco. But the decision to deny the application for the merger shocked the domestic electricity sector, clean energy advocates, as well as the stakeholders.

“Most people felt the best shot of stopping this merger was in Maryland, not D.C., so most of us were shocked when they voted unanimously” to deny the merger, Tidwell said.

“Exelon is likely as stunned to lose today as we were stunned when Exelon won in Maryland,” Tidwell said Tuesday. Exelon and Pepco’s stock prices dropped immediately after the decision, a year and a half after they spiked when the market found out about the proposed merger. “Exelon is a sick and ailing company because they’re overly burdened by a nuclear fleet,” Tidwell said, and wanted to seek revenue from a merger like this one. Other companies may want to buy Pepco; advocates hope that any eventual buyer supports distributed renewable energy adoption and energy efficiency efforts.

Going forward, Exelon and Pepco have a few options, and none of them seem likely to result in a desired merger. They have 30 days to petition the D.C. PSC for a rehearing, but this is unlikely because the commission seemed clear that the denial had solid legal footing. They could appeal to the D.C. Court of Appeals, but courts are often reluctant to overturn such decisions. Exelon could also go back to the drawing board, restructuring the merger in a way that excludes Pepco D.C., but this would be hard to do because they would have to go back and get a new round of approvals from all the other states Pepco serves. Exelon shareholders would also have to approve a new deal, which would likely be less favorable to Exelon.

Local advocates tried to engage Exelon earlier in the process to negotiate better terms for ratepayers and renewable energy access, but Tidwell said that “Exelon was not interested in any kind of substantive dialogue with the opposing entities.” They took one meeting and then barely followed up.

Tidwell said Tuesday that “what happened today is good for the long-term health of wind and solar.”