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Exelon-Pepco Merger Could Hinder DC's Renewable and Efficiency Goals, Study Suggests

efficiency goals and business mergers

Will Exelon allow its regulated utilities to rise to the distributed energy future?

If Exelon Corporation is allowed to acquire Pepco Holdings (for more than $6 billion), it will threaten Pepco ratepayers and the energy sustainability goals of Washington, D.C., a new analysis argues.

Washington, D.C. wants to be at the forefront of energy sustainability issues. It has a long-term, twenty-year goal of making renewable energy 50 percent of its energy mix and cutting citywide energy use by half.

“These existing policies and objectives are in direct contradiction to the stated policies and objectives of Exelon Corporation,” writes the Institute for Energy Economics & Financial Analysis (IEEFA), a Cleveland-based think tank that focuses on energy and the environment.

Exelon is looking to buy Pepco to bring in another regulated utility to its portfolio, as its generation assets, including its large nuclear fleet, are losing revenue due to low natural-gas prices, increased energy efficiency and more renewables on the system.

It is that tension between the two businesses that could threaten the ability of regulators in Washington, D.C., which Pepco serves, to make good on the city’s goals.

“Exelon is going to inherently have financial incentives that Pepco otherwise wouldn’t have that put Pepco customers at more risk than they’d otherwise be,” said Cathy Kunkel, one of the authors of the analysis.

Exelon has rejected a request from the District of Columbia Office of the People’s Counsel to avoid seeking a rate increase for five years after the acquisition, the report notes. Customers could get about $53 if the proposed “Customer Investment Fund,” which is part of the acquisition, was distributed as a one-time credit. Furthermore, Exelon has noted that economies of scale could reduce rates for consumers.

“Customer rates will not increase as a result of the Exelon-Pepco Holdings merger,” said Exelon spokesperson Paul Adams. “By combining our companies, we will operate more efficiently and generate cost savings that will be passed on to customers.”

Pepco would account for only about 7 percent of Exelon revenues, according to IEEFA, so any penalties that Exelon might face from the D.C. Public Service Commission for not meeting future goals would not make as much of an impact as they would on Pepco Holdings, which gets nearly half of its revenue from Pepco.

The utility lobbied against net metering for distributed solar and opposed increased renewable energy development in Maryland after it took over Constellation, which owns Baltimore Gas & Electric.

“Exelon’s record on lobbying against renewables in Maryland speaks for itself,” said Kunkel.

The analysis largely relies on previous mergers of utilities with large fleets of generation assets, as well as Exelon’s previous statements regarding renewables and efficiency. It also notes that state regulators tend to have a harder time holding mega-utilities to state goals when the regulated utility is just a small part of its portfolio.

But Exelon, the largest nuclear fleet owner in the U.S., argues that it is strengthening its investment in large wind and solar, noting it’s the eleventh-largest wind producer in the U.S. But, “their financial interest in nuclear is far higher than in wind,” counters Kunkel, who added that much of that wind is not in PJM territory, where Pepco operates.

Exelon points to the gains Baltimore Gas & Electric has made since it was acquired, including higher reliability and the more than 1 million customers enrolled in its Smart Energy Rewards program, which helps the utility cut peak energy demand.

Exelon does not dispute that it is investing in more regulated utilities to bolster its bottom line as its traditional generation business faces mounting challenges. What’s at stake is whether Exelon will ultimately rely on its regulated utilities to not just bolster, but to make up for, the loss of revenue on the generation side.

The question is not just for Exelon. The issue of diversification is playing out very differently for large energy companies with significant generation assets. FirstEnergy is cutting energy efficiency programs and digging in its heels for a fight to keep its fossil fuel plants going. Various U.S. utilities are looking to unload their merchant coal fleets

NRG, on the other hand, has been investing aggressively in its retail and solar businesses with the goal of eventually transforming its business into the preferred energy provider to millennials. For now, Exelon is not interested in getting into the rooftop solar and distributed energy business. In Europe, some generators are unloading fossil-fuel generation at a steady clip as they invest in renewables and customer-facing energy solutions.

“Down the line, there could be new blood at Exelon that could take company in the right direction,” said Kunkel, “But that’s a big gamble for D.C. in the context of this merger.”

Photo Credit: Mergers and Efficiency Goals/shutterstock

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