Will the Exelon and Pepco Merger Ultimately Fly or Remain Grounded?

The energy world will soon know whether the deal between Exelon Corp. Pepco Holdings will go through: April 7, at the latest. Despite previous rejections of the proposed merger and the two utilities having sweetened the pot as a result, it is unclear what will happen now.

The $6.8 billion combination between Chicago-based Exelon and Washington, DC-based Pepco had been approved by every federal and state regulator involved since it was first formulated in 2014 — except by the commissioners in the District of Columbia. That public service commission has ruled that the deal is not in the public interest of it citizens, with a special note that it would be the full-time residents there as well as its lower-income who would get the shaft.

“The Commission and the settling parties are in agreement that the value of the overall benefits we have committed to the District is appropriate — it’s essentially a question of how those benefits are allocated for the District,” said Joe Rigby, chairman, president and CEO of Pepco Holdings, in a statement. “To safeguard these benefits for the District and its residents, we are putting before the Commission several options that will allow the merger to move forward.”

The utilities have thus offered to put up about $25 million into a fund to give its customers rate relief and another $20 million into a fund that would allow the public service commission to make grid updates, or use as it pleases.

That may — or may not — satisfy the commissioners there. But it has not won over some city officials, namely the city’s mayor, Muriel Bowser. She says that the low-income are inadequately protected if the the deal were to go through.

Meantime, the environmental community opposes it as well, saying that it would not invest enough money into clean energy. Public interest groups, furthermore, say that it puts too much power into an out-of-state utility.

So, why is Exelon even interested in buying Pepco? To gain entrance into the Northeastern markets where Pepco serves and to improve its cash flows, which have been hurt by cheap natural gas that has eaten into its nuclear energy sales.

Pepco operates not just in the nation’s capital but also Maryland, Delaware and New Jersey. During the height of the electricity restructuring craze in the late 1990s, Pepco sold off its power plants and focused exclusively on its regulated delivery business.

The Exelon-Pepco deal wants to be part of what now has been a trend within the utility sector: FirstEnergy Corporation’s purchase of Allegheny Energy in 2010 for about $4.7 billion and Duke Energy’s marriage with Progress Energy in 2012 in a deal valued at about $25 billion. And, NRG Energy’s buyout of GenOn in 2012 for $4.2 billion

Combining forces is about having better access to capital and capital markets, which helps beef up investments in both infrastructure and technologies. Those tools improve everything from customer services to environmental compliance, which could further prove itself through superior credit ratings that make it cheaper to borrow.

“Now we are entering an era where utilities are trying to figure out how mergers and acquisitions can help them maintain adequate profitability and growth in a more distributed world, as the utility business model is forced to adapt to new technological, market, and environmental realities,” says William Kemp, co-founder of Enovation Partners, a Chicago-based energy strategy consultancy, in an interview.

Commissioners, generally, understand this fundamental shift and are trying to determine how it fits into the regulatory regime — a dynamic now manifesting itself in the District of Columbia.