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Exelon deal for Pepco remakes region’s energy map

Exelon Corp. is at it again, looking to buy the parent to one of Maryland’s major power companies.

Chicago-based Exelon agreed to buy Pepco Holdings Inc. for $6.8 billion in cash, both companies announced Wednesday.

The deal is subject to approval by federal and state regulators. Pepco is the parent of three utility companies, Potomac Electric Power Co., Atlantic City Electric Co. and Delmarva Power & Light.

Pepco Holdings distributes power to approximately 738,000 customers in Maryland and over 1 million more in Washington, Delaware and New Jersey. If Exelon acquires it, which it plans to do by the second or third quarter of 2015, it would become the leading mid-Atlantic electric and gas utility, serving 10 million customers, including more than 2.6 million in Maryland.

“The geographic fit of Pepco utilities within the Exelon utilities is second to none,” Exelon CEO Chris Crane said in a conference call Wednesday. “There’s a natural overlap of our operations in the mid-Atlantic that will enable us to realize cost savings and improve reliability for all of our customers.”

It’s up to regulators to decide if this merger would actually benefit customers, but it will be a while until they do. The Maryland Public Service Commission said it cannot comment on the combination until the parties have filed for regulatory approval, which they plans to do in the next 45 days.

Exelon remained confident that the deal would benefit both customers and shareholders. How exactly it would do so remains to be seen, but here are some of the key areas where important questions have to be answered.

Will there be savings?

In speaking with investors Wednesday, Exelon talked up the synergies it would gain from a combination with Pepco. It expects $250 million in synergies in the first five years, one-third of which would be retained by the company.

“In that sense, since this is a regulated entity, Pepco, any efficiencies that occur, ratepayers, customers are going to get a good portion of that,” said Charles Fishman, analyst at Morningstar who follows Pepco Holdings. “I think this is certainly benefiting customers of Pepco.”

How those synergies would be achieved remains unclear, but Exelon said these cost savings would only be a small element in the 15- to 20-cent earnings accretion investors would see beginning in 2017.

Exelon has also said that it would give $100 million in customer benefits, about $50 per customer, upon the transaction’s closing.

When it comes to staffing, Exelon said the Pepco Holdings companies would retain their headquarters in Washington, Delaware and New Jersey. Pepco Chairman, President and CEO Joseph M. Rigby has already announced his planned retirement, but would stay in his current roles until the acquisition was completed.

If the company does reduce employees, it might be in areas like engineering and accounting, said Fishman, because these are jobs that do not need to be located near customers. But a lot of the people that the public sees working in the community would likely still be needed, he said.

Not everyone thought the deal is a good one.

“We all know that bigger is not better. It’s not better for innovation, it’s not better for the environment and it certainly is not better for consumers,” Sen. Jim Rosapepe, D-Prince George’s, said in a statement Thursday. “The questions Exelon’s proposal raises is whether they can modernize the Pepco grid to 21st century standards well enough and fast enough to offset the costs of further concentration of economic and political power in Chicago.”

What about reliability?

Exelon touted its performance in power restoration following dramatic storms that hit the mid-Atlantic in recent years. The proposed merger, said Crane, could help to improve reliability for all customers.

Through BGE, Exelon has already been dealing with reliability adjustments in Maryland that have also affected Pepco.

“Pepco, along with BGE, had to take steps to increase their overall reliability,” said Paula M. Carmody, the Maryland people’s counsel. It’s a constant issue among all the utilities in Maryland, she said.

Potomac Electric especially has experienced a surge of customer complaints after storms.

“The reliability problems that Pepco [in] Maryland has had, the commission is aware of it, the company is aware of it and there’s back and forth going on,” said Fishman. “Will it move faster with Exelon? Maybe. You’re dealing with a bigger company with more resources.”

How long will approval take?

Since it acquired Constellation Energy in 2012, Exelon has much more experience dealing with Maryland regulators.

“We believe our experience learned from the Exelon-Constellation merger will position us to secure the needed approvals by the second or third quarter of next year,” said Crane.

That deal took just less than a year from the company’s announcement until all necessary regulators had approved it. The deal closed only days later.

Exelon said Wednesday that it expects to file for approval with all necessary agencies likely within 45 days, but within 60 days at the latest. From there, it expects the Federal Energy Regulatory Commission to issue an order within 180 days and the Maryland commission within 225 days. But the company also needs approval from New Jersey and Delaware authorities, which do not have required timelines.

Fishman agreed that the Constellation deal was a good primer.

“I just think they have probably a much better relationship with the regulators,” said Fishman. “I think there’s more of a comfort level that’ll probably help.”

However, Carmody said, even if the company plans to use a similar playbook with regulators, it’s too early to tell how the case will go in Maryland.

“They’re all different cases with different facts,” she said. “The commission has to decide that it’s in the public interest. … That will take a lot of digging.”

One comment

  1. There goes everyone’s bill…there will be no leverage by using other local utility companies rates to keep our rates down. Everyone better hope that the PSC blocks this deal.