By Suzanne Herel and Rich Heidorn Jr.

Exelon on Monday offered a split D.C. Public Service Commission a “middle ground proposal” in a bid to salvage its acquisition of Pepco Holdings Inc.

In a joint filing, the companies asked the commission to approve either the original settlement negotiated with Mayor Muriel Bowser or the revised proposal outlined by Commissioner Joanne Doddy Fort and supported by Commissioner Willie Phillips on Feb. 26. Commission Chairwoman Betty Ann Kane opposed the revised settlement after voting 2-1 with Fort to reject Bowser’s deal. (See DC PSC: Will OK Exelon-Pepco Deal for Additional Concessions.)

The companies also offered a third alternative: adopting Fort’s revised settlement, while addressing the mayor’s concerns with shielding residential customers from rate hikes. It would give the PSC discretion to use an additional $20 million — which Bowser’s settlement earmarked for smart grid and environmental programs — for rate relief.

The companies did not offer to increase the $72.8 million customer investment fund (CIF) they are offering D.C. to approve the merger.

The deal began to look doubtful last Tuesday as Bowser, the Office of the People’s Counsel and Attorney General Karl Racine announced their opposition to revised terms set out by Fort. D.C. Water followed with its rejection later in the week. (See Exelon-Pepco Deal in Doubt as Mayor, Consumer Advocate Balk at New Terms.)

Together they represent three of nine settling parties that must agree to the new deal in order for it to be approved without further commission action. At issue for all was the reallocation of $25.6 million from the CIF that would have shielded residential consumers from rate hikes until 2019. The PSC voted 2-1 to defer a decision on how to spend the funds until the next Pepco rate case, signaling that it would distribute the money to nonresidential customers as well.

The commission’s Feb. 26 order had required responses from the settling parties by March 11. Exelon and Pepco asked the PSC to rule on their new proposal no later than April 7.

“The joint applicants believe that the commission can address its concerns with the residential customer base rate credit, as well as the settling parties’ concerns with the terms of the [revised settlement], through additional alternative terms which preserve the function of the residential customer base credit and move $20 million in CIF monies from the newly created [Modernizing the Energy Delivery System for Increased Sustainability] pilot project subaccount to a separate customer base rate credit fund.”

The $20 million fund would be spent following Pepco’s next base rate case as directed by the commission, potentially providing commercial customers rate relief or increasing funding for the Low-Income Energy Assistance Program.

“In the event that the commission determines that any or all of the additional $20 million should not be used for these purposes, it could allocate any unused portion of the $20 million to the MEDSIS pilot project subaccount.”

The companies said their proposal “does not prevent the commission from using CIF monies to advance the grid modernization proceedings in [a second docket,] Formal Case No. 1130. Instead, the revised allocation provides the commission with additional discretion over how best to use $20 million of the $72.8 million CIF to advance its competing priorities.

“It would be tragic if customers lost the $72.8 million CIF and the many other benefits of the merger recognized by the commission and the settling parties because of disputes over how a portion of the CIF should be allocated,” they wrote.

The mayor, OPC and attorney general had no immediate comment on the companies’ revised proposal.

The Power DC coalition immediately asked the PSC to reject it.

“Exelon’s latest filing is another example of the company’s total arrogance and disregard for D.C. residents,” said spokeswoman Anya Schoolman. “The Public Service Commission shouldn’t let Exelon rearrange deck chairs on the Titanic. It is time for D.C. to move on.”

Councilwoman Mary Cheh also signaled her opposition. “We expected that Exelon would try a Hail Mary pass, but from my analysis it doesn’t appear to satisfy requirements set forth by the Office of the People’s Counsel in terms of protections for ratepayers,” she said.

Exelon not Giving Up

CEO Christopher Crane said in a Feb. 3 earnings call that the company would abandon the merger and begin buying back the 57.5 million shares it issued for the $6.8 billion deal if D.C. regulators did not approve it by March 4.

But company officials said Thursday they were delaying the deadline as a result of the PSC’s action Feb. 26.

“March 4 was the date after which Exelon and Pepco Holdings would have the right to stop pursuing the merger, if the Public Service Commission had not acted by then,” Exelon said in a statement. “Because the commission issued its order on Feb. 26, the March 4 date is no longer a trigger, and we are free to stop pursuing the merger if either party so chooses.”

Political Posturing?

Guggenheim Securities analyst Shahriar Pourreza said the fate of the merger may depend on whether Bowser and other officials truly want out of the deal or are playing politics.

“The big swing factor is if the mayor, attorney general and Office of [the] People’s Counsel are politically posturing or if they used Friday as an excuse to get out of this deal,” he told RTO Insider. “If it’s the former, it’s probably workable.” But, he said, “the longer they wait, the more the fundamentals of Pepco deteriorate and … the less attractive this transaction is.”

The PSC said that if all settling parties agree to its offer, the merger will be approved without further commission action. None of the D.C. officials opposing the PSC settlement has proposed a counteroffer.

The acquisition would give Exelon Pepco’s stable regulated income and the crown as the nation’s largest utility. But Pourreza said the deal has “materially deteriorated” over time. In a research note earlier in the week, he said, “We believe there is increasing likelihood Exelon could walk from the deal.”

Pepco ‘in Distress’?

“You kind of wonder if this even makes sense for Exelon,” he said. “There are plenty of single-state regulated utilities that they can go acquire that are not in as much financial distress as Pepco. This is not a healthy utility as a standalone entity.”

The PSC disagrees.

“There is no evidence in the record that Pepco could not continue to perform, and perform adequately and reliably as required by law, absent the … approval of Pepco’s sale to Exelon,” it said in its order Feb. 26. “Indeed, as the commission found in [its August 2015 order in the case], ‘PHI is financially healthy as a standalone company and would continue to be so if the merger is not consummated.’”

The merger already has the blessing of FERC and regulators in Delaware, Maryland, New Jersey and Virginia. They signed on under a “most favored nation” status, meaning in the end, all will be compensated equivalently — a disincentive for Exelon to sweeten the deal further with the district, Pourreza said.

If the merger doesn’t go through, Pourreza said, other suitors might be deterred from trying to purchase Pepco, given the regulatory hurdles D.C. has presented. “I think that these regulators have jeopardized this utility,” he said.

Dividend in Doubt?

On Monday afternoon, Pepco’s stock closed at $24.22, down 20 cents (0.82%) for the day. Exelon’s shares closed at $33.92, up 56 cents (1.68%).

If the merger doesn’t close, Pepco shares could lose $4 to $5 per share, Pourreza wrote. “Given that [Pepco] has been out of a rate case since 2014 and the delays with this merger, [it] has materially deteriorated as a standalone company, in our view.”

That could push its $1.08/share dividend to a 6% yield.

“It’s even questionable if they can support the dividend,” he said. “It’s pretty mind-boggling, the games that these regulators are playing. The agreement that the commission brought on Friday is very workable. I sort of question whether the commission did this because they knew that the settling parties wouldn’t go for this.”

Pourreza said he was at a loss to speculate what more Exelon could offer to salvage the deal, noting that “in a perfect world,” it should be offering less, not more, for Pepco at this point.

“I thought what the commissioners put out was equitable and now all of a sudden this is coming down to the $27 million issue,” he said. “It doesn’t make any sense to me. I tend to think [Bowser, Racine and OPC Sandra Mattavous-Frye] want out of this deal. … This is very abnormal.”

Cheh said the difference between using the fund to insulate ratepayers temporarily, only to have Exelon recoup the difference after four years, and disbursing the money when there is an actual rate case is not dramatic.

That, she said, leads her to think that Mattavous-Frye — an initial opponent of the merger who reversed course to back the mayor’s settlement — used the PSC’s proposed changes as an excuse to back away from the deal.

“Once Mattavous-Frye was out, the mayor was kind of stuck, I kind of think, because what was she going to say, ‘I think it was a good deal?’” Cheh said.

“What was at issue was a power struggle between the PSC and the mayor and who trusts whom,” Cheh said. “The fact that it may be scuttled over who gets to play with this money seems another surprising turn in all of this.”

One sticking point is that the rate relief would be shared with commercial customers, Cheh said. The U.S. General Services Administration, representing the federal government, the largest electricity consumer in the district, opposed the merger until the PSC offered the concession to broaden rate relief.

The settlement would have protected residential ratepayers through Bowser’s four-year term and potential reelection campaign.

“People have been saying all kinds of things,” Cheh said when asked if that might be a factor in Bowser’s insistence on preserving the rate credit. “Now that my rate increase may come right in the middle of your term — if you were the mayor, that’s something you would take into account.”