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Is the Takeover of PEPCO by Exelon in the Public Interest?

Wednesday, May 6, 2015   (0 Comments)
Posted by: Joe Libertelli
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On April 8, 2015, the School of Law’s Environmental Law Society (ELS) hosted a public forum entitled “Is the Exelon Takeover of PEPCO in the Public Interest?” The Forum consisted of two panels of public officials and other legal experts who looked at the issue through varied lenses and who entertained questions from the audience.  Each panel was moderated by a UDC Law student.

The presentations made by the panelists and their responses to questions posed by the panel moderators and members of the audience resulted in a discussion too complex to fully summarize, but an attempt is made, below. However, please consider watching and listening to the entire program here:

 

ELS President Chris Connelly, ’15, welcomed the nearly 100 in attendance and provided a brief overview of the issue and the challenges ELS encountered in attempting to find a financially disinterested proponent of the multi-billion dollar deal that would see local PEPCO (Potomac Electric Power and Lighting Company) taken over by the Chicago-based Exelon, one of the nation’s biggest energy companies and the nation’s single biggest nuclear power company.

(Initially, the students sought to include an Exelon proponent who neither worked for PEPCO nor Exelon and who did not own stock in either company – but were unable to find someone.  After a letter by a PEPCO Vice President urging that a more “fair” presentation at the forum, the students agreed to invite the letter-writer, PEPCO VP, Marc Battle, to speak and to grant him double the time of other panelists.  This was not sufficient for PEPCO, and Mr. Battle and PEPCO President, Donna Cooper, called the School to ask for additional time for the pro-Exelon takeover views.  Again, the students agreed, offering to include an additional participant, so long as he or she was not a financially interested party.  And, again, PEPCO declined to participate.)

On the first panel, moderated by UDC Law student Marquel Ramirez, ’16, the first speaker was DC Councilmember and GW Law Professor Mary Cheh, who chairs the Council’s Committee on Transportation and the Environment.  Ms. Cheh focused her remarks on the conflict inherent with the District ratepayers’ interest in Exelon’s business model – which is to sell non-renewable energy.  She reminded the audience of the 1999 DC Public Service Commission-required divestment of PEPCO’s energy production assets, which was done explicitly to avoid the inherent conflict between production and energy purchase. After listening to the testimony elicited at a hearing held by her Committee, Councilmember Cheh concluded that, in the long run, higher prices will result from this acquisition as she does not believe that the corporate accounting “ring fence” designed to protect the DC ratepayer for five years, would be sufficient and would not be vulnerable to “creative accounting” and that, at best, it would only last for five years.  She also pointed out that should Exelon prevail, it would also take DC away from local control of its local utility, leaving DC a “little minnow in the stream” controlled by a far-away company.

Up next was Tim Judson, the Executive Director of the Nuclear Information and Resource Service (NIRS), which is a national organization which serves grassroots people across the country who are concerned about nuclear power.  He pointed out that Exelon is the nation’s largest generator of nuclear power, which has become vulnerable to economic pressure and energy trends.  According to Judson, 2013 was an historic year for nuclear power, with five reactors closing in one year – the first such closures in over 15 years.  Exelon, he maintained, in addition to owning old nuclear power plants, has an old and increasingly antiquated business model for utilities and, while increasingly vertically integrated, still has a much larger generation than distribution business. This is problematic because over the last 7 years, the market price of electricity has fallen, not only because of natural gas and fracking, but because of the expansion of conservation and the spread of renewable energy technology, which is a threat to Exelon’s business core, which is nuclear generation. With one quarter of Exelon’s 23 nuclear power plants are in danger of closing they are under increasing pressure from Wall Street, and have, therefore, moved to expand their guaranteed revenue stream from regulated utilities.  Not only would the takeover of PEPCO make Exelon the biggest utility in the nation, but due to its regional concentration, it would have unprecedented monopoly control, not only in terms of energy prices, but also of energy policy.  The bottom line is that Exelon’s bottom line demands it make energy and electricity cost MORE, not less.

Tyson Slocum, who focuses on public utilities nationwide for Public Citizen, explained the genesis of the public utility concept, which began with Thomas Edison’s first local electricity system in New York City.  Because of the key role of electricity supply for modern society, public regulation is necessary.  From his point of view, Exelon seeks to acquire PEPCO’s two million ratepayers to guarantee cash flow and to make up for losses in power generation; balancing risk by shifting it onto PEPCO ratepayers.  He said that Exelon will borrow all $6.9 billion needed to purchase PEPCO at a premium at 3 to 4 % after taxes – but will generate over 9% in revenues on those funds from PEPCO customers, because the law allows the costs to be passed through to consumers.  At the same time, PEPCO’s valuable assets were paid for, almost in their entirety - virtually all the wires, stations and other assets - by the local ratepayers.  Slocum argued that other potential purchasers, though offering less to PEPCO, offer a better deal for the DC ratepayers.

Moderator Ramirez called the audiences’ attention to the sheet which contained the seven public interest factors which must be considered by the PSC.

Law student Jessica Christy, arguing the case for the takeover, pointed out that Exelon is known as an excellent employer and has won awards and appellationsfrom the Human Rights Committee, Hispanic Business Magazine, and GI Jobs and, also, that it is a top supporter of HBCU (Historically Black Colleges and Universities) engineering schools.  She argued that their deeper pockets will lead to improved reliability, lowering outages and resulting in millions of dollars in ratepayer savings. She pointed out that Exelon has promised rate stability, and that it would not include merger costs for five years.  She also pointed out that Maryland customers will see $61.5 million in benefits and that, as a result of the merger, there will be job growth and that Exelon will continue PEPCO’s rate of charitable donations. She also stated that Exelon is the largest wind producer in the US, that it runs the nation’s largest urban solar farm in Chicago and that Dunbar High in DC has a big partially Exelon-funded solar installation. Exelon, she said, has also a good track record of support of minority-owned distributors. 

Moderator Ramirez then asked a question of the panel regarding a controversy that arose in Illinois involving a bill that would rework the state’s renewable energy portfolio in ways that would work against renewables and for nuclear power.

Tim Judson explained that Exelon is proposing IL legislation which would create a low-carbon energy standard, which is a step away from an attempt at calling nuclear power “clean.”  Exelon, he said, killed a bill to fix flaws in the renewable energy standards so that renewable energy would be supported, which has bottled up hundreds of millions of dollars. Exelon succeeded in this by threatening to close half its plants, thus putting pressure on the state legislature.  It demanded subsidies for nuclear energy, and worked to guarantee that program subsidies would go to nuclear power, through a surcharge - a $300M year cost increase to subsidize nuclear.

Tyson Slocum said that Exelon’s interest in beating renewables, which plays a central role in maximizing sales from older power plants, puts it at odds with the interests of DC ratepayers.  He said that Exelon’s track record shows that they are not a good partner for renewables whereas  PEPCO, not a generator, doesn’t have a vested interest in where the power comes from.

Councilmember Cheh focused on the inherent conflict between what Exelon is all about and what the District is all about.  Exelon opposes distributed energy and renewables.  She said that DC will “never get to our 50% of renewables by 2032 and we will never get there with Exelon: Lipstick on a pig? It’s still a pig!”

Comments and questions came from numerous members of the audience.

The second panel was moderated by law student Jessica Christy. Leading off the second panel, Scott Hempling, raised, in humorous riddle fashion, various “crosses” between disparate animals.  He chided the DC Council for its failure to act in a timely fashion in the face of a public bidding war where PEPCO sought the highest price for its stockholders - and not the best company for the DC ratepayer and the environment.  He highlighted “asymmetrical risk taking” as a central problem with a large out-of-area corporation running an essential service like an electricity utility.  He argued that permitting Exelon to acquire PEPCO would usher in another century of centralized control, and the loss of head-to-head competition, and benchmark competition.

DC People’s Counsel Sandra Mattavous-Frye, ’83, said that, without a doubt, the case is the most significant case to come before the PSC in decades and rivals the implementation of customer choice.  This will result in an irrevocable change – and while she’s not against change, the law requires that any such change provide measurable benefits the DC consumer and the environment.  The PSC rules say that a change like this the consumers must receive short and long term financial benefits and must, overall, be in the public interest.  She is unconvinced that the applicants have met their burden: regarding rates: she is convinced they will be higher; regarding reliability, Exelon has not committed to assuring that the recent gains by PEPCO will continue; with regard to renewables, DC has made tremendous strides, is becoming a national leader, but Exelon is, by definition, and due to it’s business model, is inconsistent with this direction; and with regard to regulation and risk, replacing a home-grown company with a giant company headquartered in Chicago does not add to accountability and control.  Decisions on major expenditures will be made by the Exelon board, not the local subsidiary.  The 128 dollar rate credit being offered to the DC ratepayer will, she said, be taken away as soon as the next rate case is filed – just as with BG and E, the Baltimore utility purchased a few years ago by Exelon.

Maryland People’s Counsel, Paula Carmody, ’80, explained that she represents residential utility customers on rates and reliability, not sustainability and the environment as is the case for her colleague Sandra in DC.  Ms. Carmody pointed out that MD law says that a merger must result in no harm, provide benefits, and be in the broad public interest.  She explained that the MD and DC PSCs will be making the decisions after multiple rounds of testimony, briefs, over 20 parties. 12 days of hearings – a very complex process.  Based on all this information, she and the MD PSC staff recommend an outright rejection, as they are convinced that this merger will bring harm to customers in the state of MD.  She said there are no benefits that will offset this harm and in her view and in the view of the MD PSC staff, the “enhanced benefits” accepted by Montgomery and Prince George’s Counties, among others, do not change the overall picture.  Ms. Carmody agrees with assessment that this deal presents real monopoly problems, that all decisions will be made in Chicago and that there would be a negative impact on renewables. She pointed out that the renewable projects promised as enhanced benefits will all be paid for by the ratepayer-  so what would the rate-payer actually be getting?

Diana Moss, President of the American Anti-Trust Institute, explained that her organization advocates for fair competition, innovation, and entrepreneurship and not “consumer protection” per se.  In the bigger picture, she explained that America is in the peak of a merger wave – food, airlines, energy, broadband, and more and that we’re hitting the wall, with few competitors in key sectors.  She believes competition is just as important as consumer protection and is ultimately essential for consumer protection.   Ms. Moss argued that Exelon’s enhanced market power as a result of this acquisition would allow them to control prices and to exclude rivals – warning that “nefarious, mischievous, behavior” would result in the exclusion of rivals, new technologies such as distributed energy production, new transmission developers, demand side players – all leading ultimately to higher prices.  While she said that the US Department of Justice is looking into these issues, the US Federal Energy and Regulatory Commission (FERC) “took a pass” on this and that, generally, the existing regulatory structure does not deal effectively with competition-related issues – resulting in a huge void.

Christy asked about the impact of the Maryland Attorney General’s public opposition and, particularly the absence of an engineering study.  Ms. Carmody explained that Mr. Frosh was probably referring to float general suggestions that would be paid for by the consumer and avoided the details because they were not yet in a position to know precisely what reliability enhancements would be needed – an assertion belied by the inclusion of reliability enhancements in the enhanced benefits recently announced – apparently simply extending existing PEPCO plans.  “All of it is just bogus” she said – “It’s a game.  It’s a shell game.”  Ms. Mattavous-Frye commented on the similar DC reliability plans, where Exelon stated at the beginning that it could not meet existing reliability standards – standards which PEPCO has, in fact, been meeting for the past two years.  More recently, though, they have back pedaled, though without sufficient assurances, “once they get approval, all bets are off.”

Mr. Hempling pointed out that this is not about PEPCO’s performance – if it was, we certainly would not look towards a company with conflicts of interest, which is a major risk taker, which is blowing its debt budget on equity, and which would be managing from Chicago.

Ms. Carmody said that Exelon has attempted to take credit for improved reliability of BG and E’s improvement – which was actually achieved through enhanced regulations which resulted in similar improvements in PEPCO.  Mattavous-Frye pointed out that Exelon claims of bringing best practice and improved performance are not only lacking in detail, but not based on sufficient knowledge of PEPCO and existing DC energy practice.  Individual benefits are insufficient to offset systemic harm. 

Moss argued that, generally speaking, the community benefits don’t add up and are often ineffective, claimed efficiencies don’t pan out, mergers generally increase prices.

 


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