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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Nuclear Utility Suffers Setback As DC Pursues Clean Energy

Nuclear Utility Suffers Setback As DC Pursues Clean Energy

Regulators for Washington DC rejected the proposed purchase of Pepco Holdings by Exelon, potentially killing off the $6.84 billion acquisition. By law, the DC Public Service Commission (PSC) said, the deal must benefit the public, and not just leave it unharmed. Chairman Betty Ann Kane said on August 25 that the body’s move was “one of the most important decisions the commission will ever make.”

The rejection was momentous, as Exelon had already received approval from neighboring states in the region, including Virginia, Maryland, New Jersey, Delaware, along with the regulatory approval from the Federal Energy Regulatory Commission (FERC). The shareholders of Exelon and Pepco had also given their endorsement.

But DC regulators took heavier scrutiny than their counterparts in other states. The PSC, in the summary of its decision, underscored the skepticism over allowing a deal to go through, arguing that “a rate case lasts only until the next rate case. This decision is forever.” The deal garnered more interest than any other proceeding conducted by the commission in over a century, the PSC said. Pepco’s share price dropped by more than 15 percent immediately following the announcement, and Exelon’s stock was down more than 4 percent.

There were a long list of problems that pushed the commission into blocking the takeover of Pepco, and some of the arguments highlighted the pivotal point that the utility industry finds itself in. Related: Donald Trump Sees No Danger For Environment In Keystone XL Pipeline

DC’s PSC argued that the takeover of Pepco could interfere with the city’s mandate “to pursue a cleaner and greener future that includes more renewable energy resources and more distributed generation,” which could be difficult “at a time when the electric industry is undergoing significant transformation.”

Weighing the pros and cons, the PSC noted the significant benefits to the city and its ratepayers from the proposed merger. For example, Exelon would pay $33.75 million into a fund that the district could use at the PSC’s discretion. That amount is equivalent to about $128 per ratepayer. Also, Exelon offered a significant premium for Pepco, offering up $1.6 billion more than what Pepco’s assets were worth.

On the other hand, the merger would not provide benefits to the District in the form of enhanced reliability. Nor would the more complicated management structure be a good thing for the city. Regulators would have a tougher time overseeing a massive utility in which Pepco was just one part of the combined company’s portfolio.

Pepco is the city’s only distribution company. If it was swallowed up by Exelon – whose main business is in generating electricity rather than distributing it – that could work out to the detriment of DC ratepayers. Related: Low Oil Prices: Assessing The Damage So Far In 2015

More to the point, Exelon’s core business is from big centralized power plants, about 80 percent of which are nuclear. A January 2015 report from the Institute for Energy Economics and Financial Analysis (IEEFA) concluded that Exelon is seeking to grow the regulated side of its portfolio – in which stable rates are assured by regulators, and rate increases can be secured to cover rising costs – because its aging power plant fleet is struggling in unregulated markets. In other words, its old nuclear power plants are losing business to competing natural gas-fired power plants and even renewable energy.

To offset those losses, Exelon is building out its regulated assets, which offer more protection. That is why it paid a $1.6 billion premium for Pepco.

But of course, to cover the declining profitability, DC ratepayers could end up paying higher rates, the IEEFA report concludes. DC regulators apparently agree. Backing that up is Exelon’s track record: Prior to the proposed Pepco purchase, Exelon bought Baltimore Gas & Electric and has since raised rates multiple times.

Another problem with the merger is the fact that Washington DC is pursuing more distributed energy, such as rooftop solar. Given Exelon’s heavy reliance on centralized power plants, if Pepco is taken over, the PSC believes that Exelon could slow DC’s move towards more rooftop solar. Renewable energy can push down wholesale power prices, which would hurt cash flows at Exelon’s generating units. As such, the PSC concluded, Exelon has a conflict of interest when it comes to meeting DC’s renewable energy goals. Related: OPEC’s $900 Billion Mistake

This development points to increasing conflict and competition as the shift across the country towards distributed renewable energy gains momentum.

“As the Commission recognized in its decision, the proposed acquisition would have been a substantial step backwards in the District’s efforts to move toward more sustainable electricity generation and greater reliance on local, renewable energy,” Power DC, a grassroots organization that formed in opposition to the merger, said in a statement. “It would have exposed D.C. residents and businesses to the risk of steeply rising electricity bills.”

Exelon and Pepco have 30 days to appeal.

By Nick Cunningham of Oilprice.com

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