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Objections to Pepco-Exelon Merger Filed with PSC by Four Council Members

December  7, 2015

To: Betty Ann Kane, Chairperson; Commissioners Joanne Doddy Fort, Willie L. Phillips=

From: Councilmembers Cheh, Allen, Silverman, Grosso

Re: Proposed Settlement between Pepco-Exelon and Some Intervenors in FC1119

We write to urge you to reject the recently proposed settlement in Formal Case No. 1119, the application for approval of Exelon Corporation’s acquisition of Pepco Holdings, Inc. (PHI). We have had a chance to review the settlement terms,  and it is  our belief that the acquisition as proposed remains contrary to the  public  interest. Many of the alleged benefits of the settlement are either Exelon complying with existing law, agreeing to standards below those already met by Pepco, or short-term benefits that  in the long-term  have  detrimental  costs to ratepayers  and  the  DistrictofColumbia.

As the PSC said in its final order rejecting the acquisition:

[T]his decision is one of the most significant decisions that the Commissionwillevermake.Unlikearatecase,thisdecisionwill affect a permanent change in the ownership and control of the District’s local electric distribution company. A rate case decision lasts only until the nextratecase.Thisdecisionisforever

Pepco has been the District’s energy distributor for over 100 years. Ifthis deal goes through as proposed, Exelon will become the largest company of its kind in the nation, and will, in all likelihood, hold that powerful position over the District and the region for decades to come. We will trade our local distribution company for a massive corporation whose revenues are tied to volumetric electric sales from large generation assets-and the trade will, effectively, be permanent and irreversible. The terms of the proposed settlement may provide some benefits to the District government in next year’s budget and temporarily defer harm to residential ratepayers over the next 3 to 5 years, but they do not address the long-term harms and risks inherent in this permanent acquisition. For these reasons, we believe the PSC should stand by its earlier decision and not approve the proposed merger.

Benefit for Exelon Equals Risk for District Ratepayers

Exelon’s interest in acquiring Pepco is, at its very foundation, in conflict with the public interest of ratepayers. Exelon is struggling economically, and the bulk of its profits are tied to a risky business-nuclear energy generation.It needs to  diversify and needs to acquire healthy, reliable sources of revenue to balance its otherwise risky portfolio. That’s where Pepco comes in. Pepco is a highly regulated distribution company entitled by law to a reasonable rate of return on its operations and investments. This reasonable rate of return is currently a robust 7.65 percent, translating to over $100 million in profit annually in the District  alone.3

Buying Pepco is certainly a good long-term deal for Exelon-worth paying significantly above market price and certainly worth comparatively  smaller payments to the District government and local business groups to buy their agreement to the deal. To Exelon, these payments are short-term investments in a long-term asset that makes their company more stable. For the District ratepayers, thepaymentsareshort-termbenefitsexchangedforthelong-termriskofhavingtheir electric utility become part of a company that needsstabilizing.

Inadditiontothisbasicconcern aboutthefinancialhealth ofourelectricutility and the impact that could have on ratepayers, there are many other risks inherent   in this deal. As outlined below, Exelon has a poor reputation with its customers compared to other utility companies, and the company is an environmental dinosaur that supports and lobbies for policies that are directly contrary to the sustainable, environmentally forward-thinking initiatives of theDistrict.

PSC’s  Standard  of Review

District law requires that the PSC may approve this settlement only if it finds that that the acquisition is in the public interest,4 and as the makers of this proposal, Pepco and Exelon bear the burden of proof. Exelon claims that to meet this burden, it need only show a “direct and tangible” benefit, and that its one-time payments and temporary job commitments satisfy this requirement.5 Exelon also claims that the PSC should not consider potential or unproven harms in making its determination.6 These assertions could not be more wrong. Itis true that the PSC must find that there is a direct and tangible benefit to ratepayers, but a public interest determination also requires the PSC to evaluate and weigh potential long-term risks and benefits of the acquisition on ratepayers and the public. This is clear from the PSC’s own findings regarding what it must consider in making the determination: financial health of the companies, reliability of service, risk associated with Exelon’s nuclear operations, ability to effectively regulate the new entity, effects on markets and competition,and effects on environmental quality.7 All of these are necessarily long-term considerations.

The proposed settlement does not adequately address the long-term risks inherent in this deal-the risks that the PSC identified in its rejection of Exelon’s previously offered terms, particularly those risks from the “inherent conflict of interest” between Exelon’s ownership of generation and the policies and goals of the District.8 It is incumbent upon the PSC to look closely and in detail at every  feature ofthisproposedsettlement.OneofExelon’spublicrelationsstrategieshasbeento presentclaimsandgeneralitiestomakethesettlementappealingbycontrastingthe settlement terms with the previously offered terms-in other words, pointing how much”better”thistakeoverofferisthanthepreviousoffer.Butjustbecauseanoffer isbetter,thatdoesn’tmakeitgood;abetterofferdoesn’taddresstheactualquestion atstake-whether thisacquisitionisinthepublicinterestofDistrict residents. The PSC should not allow this public relations blitz or the short-term thinking of the settlingpartiestoalteritscorrectdecisionthat,asawhole,theacquisitionisnotin thelong-terminterestoftheDistrictanditsratepayers.

Short-Term Thinking in the Proposed Settlement  Terms

A simple reading of the settlement terms illuminates the short-term thinking of the Mayor and the other settling parties. Generally, the new terms sprinkled throughout the settlement consist primarily of one-time payments to settling parties and some commitments to do things that are already happening, were poised to happen, or that benefit Exelon.

Payments  to Ratepayers,  Settling Parties,  and Nonprofits

Acquiring the District’s electric utility will give Exelon a permanent, long-term benefit in the form of regulated utility income of over $100 million per year.9 The settling parties agree to this in exchange for one-time payments of about $39.6 million for residential ratepayers and another $39 million in payments to the District government  and  other  settling parties.

Exelon and the Mayor have made much of the so-called “rate freeze” in this deal. This is disingenuous and misleading. Exelon has not agreed to freeze rates for any amount of time. Rather, they’ve agreed only to offset the residential rate increases that they expect to receive in the next three years in an amount up to$25.6 million,plusaguaranteedpayment of$14million.11Afterthosefundsdryup,District ratepayerswillbeonthehookfortheincreasedrates.Thisisakintosigningaballoon mortgage, or having your rent permanently increase, but getting the first month at the oldprice.

Similarly, the Mayor touts an additional $39 million in payments to the District government as a public benefit. These payments ostensibly go to various funds intended for energy, environmental, or workforce development programs; but, increased amounts in those funds mean only that the Mayor can offset the funds she would have allocated for those purposes next year, freeing up money to pursueother priorities. Moreover, mayors frequently sweep or reprogram special purpose   funds

into the District’s General Fund when budget pressures arise.12 There is nothing   in

the agreement that requires the settlement funds to supplement  rather  than  supplant the special purpose funds’ regularly allocated annual budgets. Therefore, it is most accurate to consider this money as a lump sum payment to the District government.ThislumppaymentmaygivetheMayormoremoneytomovearoundin the coming year, but adding $39 million to the District’s more than $7 billion budget is unlikely to result in any significant public benefit in thelong-term.

ExelonmakesmuchofitscommitmenttomaintainPepco’slevelsofcharitable giving for at least 10 years, and in a particularly cynical move, Pepco and Exelon createdinsecurityamonglocalnonprofitsbysuggestingthatPepco’scharitablegiving mightdiscontinueiftheacquisitionisnotapproved,13spurringgroupsthatmightnot otherwiseinvolvethemselvesinlobbyingbeforethePSCtosupportthetakeover.This maneuverishighlyquestionablenotonlyintermsofethics,butalsoveracity,aswas pointed out by the Office of the People’s Counsel in its briefs.14 A commitment to continue making donations that Pepco is likely to continue making itself cannot be construed as a significant new publicbenefit.

Jobs

Exelon and the Mayor also point to commitments to increase or maintain Districtjobsforfiveyearsasabenefitofthedeal.This,too,ismisleading.Themerger protects District jobs at Pepco for up to five years, but not District jobs at Exelon or PepcoHoldings,Inc.Thissleightofhandmeansthemergercouldbenetjobsnegative for the District much sooner than Exelon implies. Indeed, Exelon has not made any long-term commitments regarding jobs in the District, even if five years could be considered “long-term.” When one reads the employment terms of the settlement, all ofthecommitmentsboildowntothesettlementterm inparagraph20:”Asaresultof the commitments in Paragraphs  14-19  [all of the employment  level  commitments],

Exelon, PHI, and Pepco commit that the Merger’s impact will be net jobs-positive for the District through at least January 1,  2018.”15  This is only a two-year  commitment

for job numbers to stay the same or higher-after that, job numbers can fall below current levels through reductions at Exelon or Pepco Holdings’ existing District offices. Further, there is no enforcement provision related to even this two-year commitment.InitsfinaldecisiondenyingExelon’spreviously-offeredterms,thePSC found that the economic effect of the acquisition “is almost certain to trendnegative

within two or three years as the protections for job retention are lifted at PHI and Pepco.”16  Surely, the  paltry  commitments  in  this  settlement  cannot  alleviate the

PSC’s concerns  about employment  effects.

Reliability

Exelon’s commitments regarding reliability in the settlement are not significant enough to change whether this acquisition is in the public interest. In its motion to reopen the record, Exelon notes that the settlement includes increased reliability commitments by Exelon beyond what Pepco is required to achieve per the PSC-imposed Electric Quality of Service Standards (EQSS)-made up of the System Average   Interruption   Frequency   Index   (SAIFI)17   and   the   System   Average

Interruption Duration Index (SAIDI). 18 Commitments to increase reliability   above

the EQSS as well as penalties in the event that they weren’t met were already in Exelon’spreviousofferthatwasevaluatedandrejectedbythePSC.Pepco’sreliability metrics have been improving year-over-year from 2011 to 2014, and they already exceed the EQSS-this is due to increased oversight and enforcement by the PSC in recent years, which could simply continue without any help from Exelon. There is no reason to think this situation would change, as the Office of the Peoples’ Counsel pointed out when evaluating these commitments. 19 Further,totheextentthe settlement reliability commitments are above Exelon’s  previous  offer, they  still start out significantly below what Pepco is already achieving. As of 2014 Pepco hadalready

reduced   its   SAIFI   to   .69,   and   reduced   its   SAIDI   to   96.6.20    The  settlement commitments for 2016are 0.91 for SAIFI and 118for SAIDI21-worsemetrics than whatPepcoachievedin2014.Acommitmenttomeetstandardsbelowthosethatare alreadybeingachieved,orclosetothosealreadylikelytobeachievedbasedoncurrent investmentandtrends,cannotbeconsideredapublicbenefit.

Additionally, Exelon has an extremely poor reputation with its customers. According to a May 2015 survey by the American Customer Satisfaction  Index,  Exelon has one of the worst customer satisfaction  scores among energy companies.22 It would be a step backwards for the District to allow Pepco to be taken over by a company so disliked by its customers just as the PSC has begun to hold  Pepco  to higher   standards.

Ring Fencing

Ring-fencing provisions cannot add public benefit to the District, as the entire purpose of the provisions is to attempt to mitigate the risk of harms that could otherwise result from the deal-harms including loss oflocal control, anti-competitive market effects due to the same company being both the District’s purchaser of electricity and a generator selling electricity to the District, and risk to Pepco’s financial health and credit ratings that could ultimately mean higher  electric rates  for ratepayers. The very existence of the ring-fencing provisions is an acknowledgment that there is a significant risk of harm present in the deal. The settlement  also makes  no significant  changes to the ring-fencing  terms that   were previously offered. Further, as in its previously rejected offer,  Exelon  only promises not to petition  the PSC to change the ring-fencing provisions  for five   years.

Environmental Concerns

Exelon argues that it addresses environmentalists’ concerns about the impact of the takeover in the settlement by adding some payments to District funds, committing to developing 7 to 10 MW of solar energy and four ratepayer-funded microgrids, and purchasing some wind power. One-time payments to existing environmental District program funds are, as discussed above, payments to the Mayor thatwilllikelynotsignificantlyaffecttheDistrict’sexistinglevelsofprogram activity. The proposed wind purchase and solar and microgrid developments sound like environmental benefits on their face, but upon examination, these alleged public benefits are simply promises to do something Exelon is already required to do or development projects from which Exelon stands to turn a profit-and, in the case of the microgrids, ratepayer-funded  profits, atthat.

Exelon’s solar and microgrid development commitments also do not add significantvaluetothistakeoverproposal.Exeloncommitsonlytobecomingaplayer in markets that already exist in the District. It takes advantage of the settlement to securesupportfordevelopmentdealsforitself.Thereisnoaddedbenefittothepublic for Exelon agreeing to do something that the private sector could do. The District government, for example, recently signed an agreement with a local solar company andcertifiedbusinessenterprisetofinanceandinstall11.4MWofsolarpoweronthe roofs of various District buildings in the coming year. This was a competitive solicitation for which they received no less than 11offers.23 Exelon’s proposal would actually take business away from the District’s local solar companies. The proposed microgrid development, similarly, would crowd out emerging local microgrid companiesthatmightotherwisecompeteforthebusiness.Notonlyistherenoadded public value to Exelon throwing its hat into the ring to compete with our many local solar developers and emerging microgrid market, but there are actually negative effects on local industry and markets due to the fact that Exelon will have an interconnection advantage that local companies don’t have. Further, the settlement provides that the microgrid developments will be funded by ratepayers, putting local companies who  don’t  have  this  source  of funding  at an  even greatercompetitive disadvantage. For these reasons, the District’s environmental groups and thelocal solar industry oppose these settlement terms.25 These groups-the experts in this field-do not perceive these terms as a publicbenefit.

Exelon also promises to “solicit offers” to purchase some wind power in the settlement.26   But  as  an  energy  supplier,  Exelon  is  required  to  either  purchase  a minimum amount of green energy or to pay a fee under the District’s renewable portfoliostandard,aswellasotherstates’renewableportfoliostandards.Essentially, this settlement term simply means that Exelon will obey laws it has to complywith anyway.Moreover,ifExelondoesn’treceiveoffersitlikes,itreservestheright,inthe settlement, to make no award and try again “at a future date.”27 Agreeing to possibly buy some wind energy in efforts to abide by current law cannot be considered a public benefit.

In the settlement, Exelon agrees to adhere to  existing regulations  regarding solar interconnection, and to shorten Pepco’s response time to interconnection  operation applications. These terms are not a public benefit,  because  agreeing  to abide by the law is not a public benefit, and interconnection response time is an issue that the PSC had  recently begun to address,  already, through  Formal  Case No.   1050.

As recently as July, the Commission held a hearing in that case to discuss delays  in Pepco’s processing of interconnection standards.28 An enforceable deadline to reply to interconnection operation applications could easily be imposed by a PSC rulemaking amending the existing solar interconnectionregulations.Further,the  settlement  terms include no enforceability provisions related to these promises, so there is no penalty for Exelon if response times are not   improved.

The settlement terms purporting to address concerns about the environmental effectsofthedealdonot createsignificantpublicbenefit,butmoreimportantly,any benefit they do provide doesn’t address or make up for the fact that Exelon is a committedopponentofpoliciesthatencouragedistributedgeneration,whichincludes solar and most renewables. Exelon opposes distributed generation because its centralizedgenerationbusiness modelisstuckinthepast,anddistributedgeneration is the future of energy. This is why Exelon has opposed net metering and policies favorable to renewable energy in Illinois, where its headquarters are,29 and why Exelonlobbiedagainstthefederalwindenergyproductiontaxcredit,s0forwhichthey got kicked  out of the American  Wind  Energy Association  (AWEA).1 Exelon   testified in the merger proceedings that, in accordance with its corporate guidelines, it would lobby against progressive policies like community solar and net metering in the District. Exelon lobbies against any form  of “subsidies” for distributed  generation not because it opposes subsidies for any principled reason, but because distributed generation threatens its core business model. This is illustrated by  the  fact  thatExelon lobbies for  subsidies for its nuclear powerplants.

Conclusion: The Proposed Settlement Is Not In the Public Interest

The long-term risks of allowing Pepco to be taken over by Exelon are clearly outlined in many of the Intervenors’ original briefs, including those of the District government. They include the loss of local control, harm to local  markets,  being subject to increased lobbying against renewable energy policies, and the risk to ratepayers of allowing their local distribution utility to become a small, financially stable subsidiary being used to offset Exelon’s  much  larger, riskier  investments  inthe increasingly unprofitable nuclear  power  generation  business.  The risks  inherent in this takeover are the harms that PSC Chairman Kane acknowledgedwhen presenting the PSC’s final decision on the proposed acquisition: “[t]he public policy of the District is that the local electric company should focus solely on providing safe, reliable  and  affordable  distribution  service  to  District  residences,  businesses and institutions.Theevidenceintherecordisthatthesaleandchangeincontrolproposed inthemergerwouldmoveusintheoppositedirection.”34

Pepco and Exelon have spent many thousands, perhaps millions, of dollars on a public relations campaign to convince the public and the PSC that this settlement deal is good for the District. But saying it’s so, and repeating it loudly, doesn’t make it true. The PSC should not let the public campaign surrounding this settlement cause it to waver in its previous determination that, when long-term effects are considered, this takeover is not in the public interest. It is not enough that this deal is “better” than the previous offer. The temporary cost defrayment for ratepayersand one-timepaymentsofferedbyExelontosettlingparties donot addressthelong-term concerns of the PSC, and neither do the short-term commitments regarding jobs and illusory benefits related to renewable energy. Aside from these alleged benefits, the settlementtermsdonotsignificantlychangethetermsoftheoriginaloffer.ThePSC’s determination that this acquisition is not in the public interest was correct, and remainscorrect.