EIA: Exelon-Pepco Merger Likely To Overcome Antitrust Concerns

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Large cap utility company Exelon has been trying to acquire smaller regional rival Pepco for almost 18 months now, but the deal has encountered some antitrust concerns that are apparently taking some time to work through. The EIA notes that the proposed merger of Exelon Corporation and Pepco Holdings would create the biggest electric utility holding company in the U.S. by number of customers with a combined 8.6 million customers.

The major issue is that the Public Service Commission of the District of Columbia initially rejected the Exelon-Pepco merger a couple of months ago, but is expected to revisit its decision based on changes to the deal in mid- to late-December of this year. All other relevant regulatory agencies have already approved the merger agreement.

More on Exelon-Pepco merger

Exelon made a formal offer to acquire Pepco Holdings for $6.8 billion in April 2014. In the proposal, Exelon noted the probability of cost reductions through both increased scale and the firms “geographic proximity and similar utility business models” as reasons for the merger.

Analysts also point out that a good number of U.S. investor-owned utilities (IOUs) have merged in the last few years, and have often been folded in as part of a corporate holding company structure.

IOUs including ComEd, Pepco, and BGE are the main electricity providers to retail customers and are overseen by state and federal regulators. For many years the Public Utility Holding Company Act of 1935 (PUHCA) forced IOUs to operate only in a single state and prevented the companies from diversifying into unregulated businesses. However, the Energy Policy Act of 1992 rolled back some of the requirements of PUHCA for the electric power and natural gas utility industries. Some states required their utilities to divest their generation assets to affiliates or independent power producers. Some states also states introduced retail competition to their electricity customers.

The Energy Policy Act of 2005 eventually rolled back almost all of PUHCA, and most major IOU holding companies have merged since then.

Where there is retail power competition, customers can usually select to receive their electricity (both generation and delivery) from the traditional IOU or they can choose a competitive retail power marketer to supply the just the generation for their power. The electricity distribution continues to be managed by the IOU, and delivery services are all regulated by state public utility commissions.

Of note, the states where Exelon and Pepco Holdings operate do permit some retail competition. IOUs connected to Exelon provide bundled services to around half of its retail customers and provide delivery-only service to the others. Current data shows that close to 20% of customers served by Pepco have chosen a competitive supplier and receive delivery-only service.

Keep in mind that the proposed Exelon-Pepco merger has already been approved by the Federal Energy Regulatory Commission and the public utility commissions in the states of Maryland, New Jersey, Delaware and Virginia.

Although the Public Service Commission in the District of Columbia rejected the merger on August 25, 2015, the mayor of the District of Columbia helped broker an agreement in late September that alters the merger terms to fix most of the objections noted by the DC commission.

Exelon and Pepco submitted a revised schedule in an October 16th filing that would see all commission-related matters concluded by December 23rd. This schedule means it is probable that the commission will not make a decision before early 2016.

Although the EIA is not an anti-trust organization, their comments seem to provide some hints on this matter.

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