Exelon-Pepco merger in dispute, heads toward hearing

Delaware's part of Exelon's $6.8 billion proposed takeover of Pepco Holdings will go to a three-day hearing starting Feb. 18, after months of sometimes-testy legal sparring, declarations of agency misgivings and calls for a bigger cash windfall for Delmarva Power customers.

Although the Federal Energy Regulatory Commission and Virginia already have approved the deal, sign-offs are needed from Delaware, Maryland, New Jersey and the District of Columbia. Criticisms about short-changing of ratepayers, warnings that the deal would suppress competition and demands for changes have surfaced in all four jurisdictions.

The merger would retain Delmarva Power, now a subsidiary of PHI, as a separate operating company in the new structure. Advocates of the merger predicted improved reliability of service from what would become the Mid-Atlantic's largest electricity and gas provider.

Nearly 190 legal filings and public comments already have appeared on the Public Service Commission's docket for the proposal, including reams of submissions by squads of consultants and attorneys.

As part of the deal, Exelon has offered to create a $17 million customer investment fund for Delmarva – the equivalent of more than $50 per customer – that could be paid out as a blanket credit credit to customer bills or earmarked for low-income assistance or other purposes.

A Public Service Commission consultant recommended a credit "not less than $100 per customer," or at least $62.9 million. Others have suggested an even higher sharing of value.

"The big issue for me is to ensure that the ratepayers not only get protected, but that they also get a great deal more than what Exelon has initially offered," Delaware Public Advocate David L. Bonar said Friday.

"They're going to have a corporation that will make them significant amounts of money over the years. The way it's currently structured, from my review of it, the only people who really benefit are the people who are going to be getting the golden parachutes."

Overall benefits to the state in jobs and other commitments, Exelon's consultants have said, could range from $88.6 million to $142.4 million. Those figures are in dispute, however.

Delmarva has 305,000 Delaware customers and 201,000 on Maryland's Eastern Shore, and 126,000 natural gas customers in New Castle County.

Among its assurances, the applicants committed to keep Delmarva's headquarters in Newark and PHI's in the District of Columbia, with charitable giving for the next decade continuing at rates higher than the $669,000 state total for Delmarva and PHI in 2013.

Glenn A. Watkins, a consultant retained by Delaware's PSC to evaluate whether or not the merger is in the public interest, called the company's economic benefit estimates "grossly overstated" and based on an evaluation that could not be checked or verified.

"There are 573 PHI service company employees located in Delaware whose jobs are at risk as a result of this merger," Watkins said in written testimony. He added that "it is reasonable to conclude that a significant" number of jobs would be lost if the company hoped to save money through the merger.

Another PSC consultant recommended legal "fencing" to protect Delmarva customers from liability and risks connected with non-regulated operations, including merchant nuclear plants that sell to the power grid.

A federal anti-trust review also is under way, and officials with PJM, the multi-state power grid operator have raised concerns that the combined companies, with control over nearly a quarter of the region's transmission service, would have less incentive for investments that increase competition.

Delaware's Department of Natural Resources and Environmental Control has recommended denial of the merger unless measures are included to assure investment in renewable energy and clean power.

"In particular, the merger poses serious questions of divergent interests when it comes to Exelon's generation assets and Delaware's interests in promoting renewable energy and energy efficiency," and in maintaining transparent, competitive energy markets" in the regional power network, a DNREC submission said.

Thomas G. Noyes, DNREC Division of Energy and Climate utility policy planner, noted that Exelon has opposed continuation of production tax credits that support renewable supplies like solar and wind. The company also owns 17,263 megawatts of nuclear power capacity.

"To the extent that Exelon is protecting its own commercial interests by limiting the development of renewable energy, it would be in effect thwarting Delaware's express interest in promoting cost-effective renewable energy," Noyes wrote.

Another DNREC consultant cautioned in a separate filing that "the proposed merger will reduce the amount of competition in an industry that needs to have more competitive entry at all levels."

Exelon's filing pointed out that Delmarva and other PHI companies would become part of a system that includes Baltimore Gas and Electric, Commonwealth Edison and PECO Energy, companies "with a proven track record of furnishing safe, reliable and efficient energy delivery services."

Disagreements over demands for document production at one point led to the scolding of an of an independent expert participating in the proceeding for "overly burdensome and vexatious" filings and document demands.

The target of the complaints, Jeremy Firestone, a University of Delaware researcher and attorney, countered with an unsuccessful bid to have the PSC's hearing examiner replaced.

Firestone said the merger applicants submitted an analysis of benefits and costs based on "undecipherable and arbitrary assumptions," and said that benefits to the companies from Delmarva's portion of the deal are potentially far higher than the $17 million offered to ratepayers.

Public Service Commission Ombudsman Matthew Hartigan said that the Legislative Hall hearing in February would be unusual for the agency, which has its own offices. The merger, however, was the largest case "in terms of public interest" to surface in 2014, and now involves large numbers of attorneys and staffers from a number of agencies.

Bonar said the merger proposal was likely to win approval in Delaware, with modifications.

"What we're trying to do is work very hard with the people who have intervened and negotiate with the company to get the best possible deal for Delaware," Bonar said.

"I think we can get it taken care of, certainly be the end of the third quarter [of 2015] at the very latest."

Contact Jeff Montgomery at 463-3344 or jmontgomery@delawareonline.com