District regulators approved a $ 6.8 billion merger between Pepco Holdings and Exelon on Wednesday, creating the largest publicly-held utility in the country.
The decision marked a surprising turn of events for the deal,which regulators had rejected twice before and which appeared to be on life-support in recent weeks as D.C. Mayor Muriel E. Bowser and other city leaders lined up in opposition.
The merger means that Pepco will now absorbed by a company with the largest number of nuclear reactors in the country and widespread operations throughout the mid-Atlantic, Midwest, and New England.
The proposal had been closely watched by environmentalists, utility and public-service attorneys, and financial analysts across the country. Because of its size, the deal is likely to change the national utility landscape.
It was also seen as a test of strength for the business community in Washington, which lobbied hard for the merger and wants to promote the nation's capital as business friendly.
In voting 2 to 1 to approve the deal, the D.C. Public Service Commission said it "was in the public interest," noting that it would deposit $ 72.8 million in a "customer investment fund", set aside $ 11.25 million for energy efficiency and conservation programs targeted toward low-income residents and carve out $ 21.55 million for pilot projects such as modernizing the electric distribution grid.
"These benefits, among others, would not be available to District ratepayers if the merger is not approved," the commission said in a statement.
But under the terms approved by the commission, millions of dollars that Bowser had wanted to cushion residential customers from rate increases until 2019 could instead go to credits for businesses or the federal government.
In a standing-room only hearing, dozens of attorneys and more than a hundred supporters and opponents of the merger went silent as the commission chairman read the order, and immediately after neither Pepco nor Exelon claimed victory.
That's in part because some players could still seek a stay to halt implementation of the order. And the terms that that the commission approved did not have Bowser's support.
In a statement, Pepco said "we must carefully review the commission's order. Once we have had a chance to do so, we will have more to say about what it means and our next steps."
Aides to Bowser were huddled in a conference discussing the decision and did not immediately return a call seeking comment. Her spokesman, Michael Czin wrote in a text message that "it appears that the PSC took away rate protections for residents."
Anya Schoolman, head of the nonprofit Community Power Network and an opponent of the deal, said she was "shocked" by the reversal. "It's up to the mayor, the people's counsel and the attorney general to decide if they will go along with the conditions they rejected," she said.
PowerDC, an umbrella group of community organizations that opposed the merger, voted to fight on.
"By approving the merger, the PSC has exposed our city to decades of higher rates, weakened its own ability to guide our city's energy future, and helped ensure that DC will fall behind the rest of the US on clean, efficient energy," according to the statement. "Our organizations and the citizens we represent will fight Exelon every step of the way to ensure that DC and the region do not suffer the same fate as Exelon's other customers."
D.C. Council member Mary M. Cheh (D-Ward 3) a fierce opponent of the merger, blasted the PSC for the reversal.
"What we're doing here is fundamentally not in the public interest for the ratepayers or people of the District of Columbia," she said. "I'll tell you who the beneficiaries are, quite plainly, it's Exelon and the shareholders of Pepco who get a big windfall out of this. Those are the people who won .. the rest of us, we lost."
Cheh said the deal would allow "a troubled" energy producer to "gobble up" a profitable distributor to make its balance sheet look better. "Exelon is a power generator who wants to sell more power," she said. "We want to encourage less energy use and conservation — it's a conflict."
"We're going to go the way of Baltimore, I have no doubt," Cheh added, referring to the way Exelon has sought repeated rate increases since taking over Baltimore's utility.
But the business community celebrated.
James C. Dinegar, the president of the Greater Washington Board of Trade, called the decision " a catapult for the region…as a place to do business because now we have the strongest, best power company in the country."
Dinegar said his organization had been an advocate of the deal because of the resources it adds to the local power equation. "It gives us more resiliency against storms, cyber attacks and more. It also gives us a quicker restart time because resources are closer," he said. "I don't have to wait on Texas and Tennessee to provide reserves."
Former D.C. Mayor Tony Williams, now the chief executive of the Federal City Council, a non-profit which seeks to influence local affairs, lobbied hard for the merger in the last few weeks.
"We're happy with the Commission's decision for both residents and employers in DC," Williams said through a spokesman. "The merger is a win for reliability, financial integrity, sustainability and corporate responsibility."
PEPCO serves more than 800,000 customers throughout its service area, which includes the District, Montgomery County and Prince George's County.
Exelon first proposed its takeover of Pepco in April of 2014.
The PSC's approval had been the final hurdle to the merger, which had been approved by the Federal Energy Regulatory Commission, the Justice Department, and the states of Maryland, Delaware and New Jersey.
The fact that the District was the last to approve the merger, combined with a somewhat complex regulatory landscape, made D.C. especially tricky, Dinegar said.
"Oh sure, there was a sweep down the East Coast of people who didn't want this merger to happen, lots of accusations and all the rest, some founded, some unfounded, all collected here," Dineger said. "But D.C. being last gave more leverage to a place that had more hoops. It's a lesson to be learned for any big-time group that wants to come in. That's not a slight on the District, but it's a bit more complicated here."
It was not immediately clear from the PSC's decision if the changed terms would need to be reviewed by other states that already approved the merger. If so, that could offer opponents such as Maryland's attorney general another opportunity to try to stop the merger.
The deal means the end of independence for one of the city's oldest institutions, but it could bring improved service for consumers and a modest premium for Pepco shareholders.
The all-cash transaction is based on a $ 27.25 share price that represents a 24.7 percent premium to Pepco Holdings' closing price of $ 21.85 on April 25, 2014, when the deal was announced.
That valued the deal at about $ 6.8 billion based on the number of outstanding shares reported in Pepco's most recent securities filing. Exelon also agreed to provide up to $ 100 million — or about $ 50 a customer — to give Pepco customers benefits such as rate credits, assistance for low income customers and energy efficiency measures.
Because of its size, the proposal is changing the national utility landscape.
Debate centered on the role of renewable energy sources like wind and solar against legacy technologies, such as nuclear power and natural gas. Many environmental groups opposed the deal because they believed it would hinder the migration toward renewable energies.
The proposal was part of a larger trend of utilities undertaking strategies that lower their exposure in competitive power markets in favor of owning regulated utilities that have more predictable, if lower, revenue streams.
"This transaction should help lower Exelon's overall business risk profile considerably by increasing its ownership in regulated monopolies and decreasing, on a percentage basis, the contributions from its less regulated merchant nuclear operations," said Paul Patterson, a utility analyst with Glenrock Associates.
The D.C. Public Service Commission at first had dealt a major setback to the giant utility marriage last August when it denied Chicago-based Exelon's proposed $ 6.4 billion takeover of Pepco Holdings.
Pepco, formerly the Potomac Electric Power Co., began as a subsidiary of a Washington electric streetcar company, selling its surplus power to other cable car operators. The company sold off the transit part of the business under the Public Utility Holding Company Act of 1935 and concentrated only on selling power to businesses and residential customers.
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