October 21, 2015

Exelon-Pepco merger could create largest U.S. electric utility

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The proposed merger of Exelon Corporation and Pepco Holdings Inc. would, if approved, create the largest electric utility holding company in the United States as measured by number of customers. The combined 8.5 million customers served by the new Exelon would surpass the number of customers served by the next-largest utility holding company, Duke Energy, which merged with Progress Energy in 2012.

Currently, Exelon services 6.7 million customers through three electric utility subsidiaries: Commonwealth Edison (ComEd) in Chicago, Illinois; PECO Energy in Philadelphia, Pennsylvania; and Baltimore Gas & Electric (BGE) in Maryland. Exelon participates in every stage of the energy business, from generation (Exelon Generation) to competitive energy sales (Constellation) to transmission and delivery (BGE, ComEd, and PECO).

Pepco Holdings currently serves 1.9 million customers. Its largest subsidiary is its namesake utility, the Potomac Electric Power Company (Pepco), with customers in the District of Columbia and Maryland. Pepco Holdings also owns Delmarva Power in Delaware and Maryland and Atlantic City Electric in New Jersey.

Exelon proposed purchasing Pepco Holdings for $6.8 billion in April 2014. Exelon cited cost reductions available through increased scale and the two companies "geographic proximity and similar utility business models" as the primary reasons for the merger. Many U.S. investor-owned utilities (IOUs) have consolidated in recent years, often under the umbrella of a corporate holding company structure.

IOUs, such as ComEd, Pepco, and BGE, are the primary providers of electricity to retail customers and are subject to state and federal regulatory oversight. One important piece of legislation that influenced the power industry for decades was the Public Utility Holding Company Act of 1935 (PUHCA), which limited IOUs to operating within a single state and prevented the companies from diversifying into unregulated types of businesses. The Energy Policy Act of 1992 relaxed the strict requirements of PUHCA regarding holding company corporate structures in the electric power and natural gas utility industries. A number of states required their utilities to divest their generation assets to affiliates or to independent power producers. In addition, some states introduced retail competition to their electricity customers. The Energy Policy Act of 2005 repealed most components of PUHCA. Since then many IOU holding companies have merged.

In states that allow retail competition, customers can often choose to receive their electricity supply (both generation and delivery services) from the traditional IOU, or they can choose a competitive retail power marketer to supply the generation required to serve their demand for power. In either case, the distribution of electricity continues to be managed by the IOU, and these delivery services are regulated by the state public utility commissions.

All of the states in which Exelon and Pepco Holdings operate allow some form of retail competition. Exelon's IOU subsidiaries provide bundled services to almost half of its retail customers and provide delivery-only service to the other half. About 20% of customers served by Pepco Holdings have selected a competitive supplier and receive delivery-only service from the utility. One of Exelon's nonutility subsidiaries, Constellation Energy, is a retail power marketer with customers in more than 15 states.

The proposed merger between Exelon and Pepco Holdings has been approved by the Federal Energy Regulatory Commission and the public utility commissions in Maryland, New Jersey, Delaware, and Virginia. The Public Service Commission in the District of Columbia initially rejected the merger on August 25, 2015. However, the mayor of the District of Columbia reached a settlement agreement with the two companies in late September that alters the merger terms to address many of the objections cited by the commission. Commission approval is still required before the merger can be completed. In an October 16 filing with the commission, Exelon and Pepco submitted a revised schedule that would conclude all hearings, replies, and briefs by December 23, likely pushing the commission's decision into early 2016.

Principal contributors: Tyler Hodge, Nilay Manzagol