What’s Next for the Exelon-Pepco Merger
On March 23, the D.C. Public Service Commission (PSC) approved Exelon’s takeover of Pepco in a contentious 2-1 vote. Within hours, Exelon dissolved Pepco by suspending the trading of Pepco stock. This move resulted in $1.6 billion windfall for shareholders – a nice chunk of which went to Pepco executives – and allowed Exelon to claim that the deal was done.
Pepco’s CEO Joe Rigby, cashed out nearly $25 million in Pepco stock before retiring and turning the Pepco (a company of Exelon) reigns over to David Velazquez (who made $5 million on the sale).
But in Exelon’s haste to make it rain for Pepco shareholders, it cast aside one important detail:
Exelon’s takeover of Pepco still has two hurdles to clear.
Opponents of the takeover have 30 days to ask the PSC for reconsideration, meaning they can appeal to the commission to change its mind and undo the merger. If reconsideration fails, opponents can then appeal to the D.C. Court of Appeals.
Exelon’s move to consummate the takeover just hours after the PSC vote to approve is a deliberate move to abridge the rights of opponents of the deal. It runs afoul of Exelon’s own argument that an order is not final until the commission has ruled on a parties’ request for reconsideration and it reveals a core component of Exelon’s strategy to handicap legal challenges to the takeover.
Once a decision has been rendered by the PSC, affected parties have 30 days to ask the commission for reconsideration. Filing for reconsideration automatically stays the PSC’s approval order.
On March 25, the first motion for reconsideration was filed by intervening party Grid 2.0, which means Exelon should not be taking any further actions to integrate the two companies.
Additional filings for reconsideration are expected by the April 22 deadline.
There is question as to whether it was appropriate for them to take any action even before the motion was filed. In fact, based on Exelon’s own legal arguments it is NOT.
In October, a month after the PSC’s initial rejection of Exelon’s proposed takeover, the Chicago-based corporation cut a deal with D.C. Mayor Muriel Bowser that resuscitated the takeover. In order for the PSC to consider the deal as part of the initial merger proceeding rather than starting the process over, Exelon argued that the PSC’s order rejecting the takeover was not a final decision because they had filed for reconsideration.
In its motion, Exelon cites a Court of Appeals finding that “an agency decision is not final…until all motions for reconsideration have been acted upon by the agency.”
And PSC Chair Betty Ann Kane might agree, in a March 29 interview with Utility Dive, she indicated that the process has not been finalized:
“If nobody files [the merger deal] would go into effect after 30 days, which would be April 22,” Kane said. “So that’s what’s next is to see what happens.”
The Scrambled Egg Defense
But Exelon’s move to dissolve Pepco immediately after the March 23 decision is not just premature; it is clearly a calculated move akin to “don’t ask for permission, ask for forgiveness” – except without the “ask for forgiveness” part.
Rather, Exelon will tell takeover challengers (the PSC and the court) that it’s too late – it can’t unscramble the egg.
In fact, Exelon has already used the argument in response to a motion filed by the District’s Office of People’s Counsel, which requested that the commission impose a moratorium on electricity service disconnections to allow Pepco to properly apply the merger’s debt forgiveness condition. Exelon promptly responded that the request should be denied because the condition had already been completed.
To be clear, it is not a valid argument. It is not a legitimate reason to uphold the approval of the merger, though it would be a very significant consequence for Exelon if the PSC’s order is vacated. But this is a risk Exelon knowingly and willingly took. District customers and the company’s shareholders need assurances that they are protected if the PSC’s approval of the merger is not upheld.
The PSC, District officials, Pepco shareholders and customers should demand that Exelon provide a plan if it is ordered to reverse the merger.
Why Exelon Did It
But locking in the scrambled egg defense is not the only reason Exelon wiped Pepco off the Wall Street map before most people heard about the decision on the 6 o’clock news. Nor is it Exelon’s public relations response, which goes something like, we couldn’t wait to start delivering merger benefits to our customers. (Tell that to its Maryland customers who just got hit with their first post-merger rate hike).
It has nothing to do with what is good for D.C. consumers, the economy of the District or the financial health of Pepco.
Due diligence and the regulatory process cost Exelon money and the corporation wanted to divorce itself from both as soon as possible.
The legal cost and financing cost for the $6.8 billion deal were rising every day that the deal was under review. The proposed acquisition was initially announced in April 2014. At that time, Exelon told its investors that it would get the deal done within a year.
It had not anticipated that its march toward a monopoly in the region would be vigorously challenged. The legal and financing cost have already clocked in at nearly $300 million.
But moving forward before the merger has cleared legal challenges is a huge gamble. Just the kind of risky and reckless activity one wants in its local utility. And the kind of move that the PSC presaged in its initial rejection of the deal – the three-person commission was concerned about its ability to regulate the largest utility in the country.
Based on Exelon’s first act as the District’s presumed utility, it appears that the PSC’s concerns were well founded. In the same March 29 Utility Dive interview with PSC Chair Betty Ann Kane referenced above, the Chair said of overseeing Pepco under the control of Exelon, “I think we’re going to have to have eternal vigilance.”
The other option is for the PSC to reconsider its decision, recognize its mistake and stop the takeover once and for all.
Allison Fisher is the Outreach Director for Public Citizen’s Climate and Energy Program