Opponents of a proposed merger that would put much of the Mid-Atlantic under control of one electricity utility are sharpening their calls on federal regulators to intervene.
At issue is Exelon Corp.’s plan to buy Pepco Holdings Inc., which serves about 2 million customers in Maryland, Delaware, the District of Columbia, New Jersey and Virginia, for $6.9 billion. All five utility commissions must approve the deal — three have done so, and decisions from D.C. and Maryland are expected by the summer. The Federal Energy Regulatory Commission has approved the merger.
Detractors say the deal could lock out market entrants such as large-scale wind- and solar-power providers to protect Exelon’s flailing nuclear power plants in Illinois and New York, while exposing customers to higher rates. They have asked the Justice Department, which is investigating whether the deal would prevent new electric generation from coming online, to block the deal or impose conditions that they say would free up competition.
“A merged Exelon-Pepco would possess an enhanced ability and pre-existing, powerful incentive to engage in vertical foreclosure and block entry by rivals. If unaddressed through antitrust remedies, the proposed merger stands not only to harm competition and consumers but also to reverse some of the gains from restructuring,” American Antitrust Institute President Diana Moss wrote in a Wednesday letter to William Baer, assistant attorney general for the Justice Department’s Antitrust Division.
The deal would give Chicago-based Exelon and Pepco more than 23 percent of the stake in PJM Interconnection, the organization that oversees electricity transmission for the Mid-Atlantic. Utilities within PJM design the rules for third-party generation, which has created fear among renewable power advocates that non-fossil fuel energy could get shut out of the grid.
Exelon said critics of the deal are making bogus claims and described the merger as a potential boon for customers. Exelon estimated $51.2 million of savings to D.C. customers alone over 10 years through improved efficiency. It noted Pepco plans to create a $33.75 million piggybank to use as the utility commission sees fit.
“Customer rates will not increase as a result of the merger. Distribution rates will be determined by the public service commissions, just as they are today,” said Paul Adams, an Exelon spokesman.
One of the most common concerns is that Exelon would arbitrage its losses from struggling nuclear generators in the Midwest by boosting East Coast rates. Exelon’s nuclear fleet exists in deregulated markets, which face competition from wind power and natural gas. Most utility customers live in regulated markets, where power companies are given a territorial monopoly but must get regulators to approve rate increases.
But the deregulated portion of its business is “ring-fenced” from the regulated side. That means Exelon can’t shift costs to customers in regulated markets, Adams said.
“As part of the merger with [Pepco], Exelon has proposed a robust suite of measures to shield the [Pepco] utilities financially from unrelated events at Exelon or its subsidiaries. Nor is there any mechanism by which Exelon could directly pass on nuclear costs to [Pepco]’s distribution utility customers, whose rates are regulated and set by the Public Service Commissions in New Jersey, Delaware, Maryland and D.C.,” Adams said.
There’s other ways, however, for Exelon to relieve pressure on its nuclear fleet by sliding costs to the East Coast, said Cathy Kunkel, a fellow at the Institute for Energy Economics and Financial Analysis.
Kunkel pointed to a 2013 deal when the Akron, Ohio-based FirstEnergy Corp. sold a pair of coal-fired power plants from Allegheny Energy, which it had bought in 2010, to Mon Power, another FirstEnergy subsidiary, at above market rates. Critics said that deal in West Virginia — a regulated market where utilities can recoup costs from ratepayers — smoothed losses from generation FirstEnergy owned in deregulated Pennsylvania.
“It’s a weird game that utilities can play that’s not addressed by ring-fencing,” Kunkel told the Washington Examiner. “At best it is limiting the risk, it is not eliminating the risk entirely.”
Moss said Justice should emulate previous action in large utility mergers, as she argued Exelon has little incentive to allow other sources of power onto the grid that could harm its business model. But Adams, the Exelon spokesman, took a shot at Adams by saying her letter to the Justice Department was “without merit,” noting the Federal Energy Regulatory Commission had already approved the merger without conditions.
Still, Moss said there’s a role for federal intervention. She noted the Department of Justice in the past has encouraged divestiture of electric generation assets, the most recent being Exelon’s 2012 acquisition of Constellation Energy, parent company of Baltimore Gas and Electric Co.
“I think the fact that DOJ is still looking into it is indicative that they have concerns,” Moss told the Examiner. “The deal is problematic.”
