Read DC SUN’s opening statement in the new Exelon hearing

By Ben Delman on December 2, 2016

Below is a copy of DC SUN’s opening statement from today’s hearing in the matter of Exelon’s attempt to take over Pepco. The Public Service Commission is taking comments from the public until December 18. Click here to make your voice heard.

As this Commission found in its Order No. 17947, Exelon has an “inherent conflict of interest” that permeates every aspect of its proposed acquisition of our local utility. A few small, rapidly evaporating rate concessions will not rectify the basic conflict with electric customers’ interests, and that conflict creates unacceptable risks.

Exelon still derives half of its revenue from its merchant generation fleet, most of which consists of aging nuclear plants that are rapidly becoming economically obsolete. Exelon will still seek to maximize profits from that essential component of its business – in other words, it will adopt corporate policies that are designed to prop up the price customers pay for energy, very much to customers’ detriment. Regardless of ring-fencing provisions, Exelon’s distribution utilities will still be vulnerable to the structural weaknesses in its generation business, and Pepco will still be one of the cash cows that subsidize the rest of Exelon’s portfolio. The Commission should not be misled by the essentially trivial, short-term payments that Exelon can easily afford to make so that it can appropriate the District’s electric franchise and then milk its customers for generations to come.

Nor do hollow, self-serving promises to develop a few renewable facilities undo Exelon’s clearly stated corporate policies that are antithetical to the District’s commitment to conserve natural resources and preserve environmental quality. Exelon still seeks to control the development of renewable generation within an outdated, centralized-control paradigm. Exelon still views distributed generation as an existential “threat” that it must control, including through its opposition to facilitating legislation. Exelon will gladly agree to build a token number of profitable solar or wind generation facilities or to develop rate-based microgrids if by doing so, it displaces more competitive suppliers and impedes an already vibrant market.

Nothing in the proposed settlement agreement suggests that Exelon has been miraculously transformed into the kind of “enthusiastic partner [that will] carry out policies and operations for a local distribution system with a greater amount of distributed generation.” As evidence of Exelon’s true character, the Commission need look no further than its Formal Case 1130, which is examining ways to modernize the grid to better accommodate new technologies. Four days after Order No. 17947, Pepco – already under the throes of Exelon – submitted a terse, two-page recitation of problems and concerns about the costs and impediments to integrating new technologies – the same kind of naysaying that Exelon has pushed in New York’s REV proceeding (and that DC SUN summarized in Appendix A to its Initial Post-Hearing Brief). The Commission should contrast the Pepco/Exelon position in August 2015 with Pepco’s pre-Exelon plans for “Utility 2.0” or the “grid of the future” in DC SUN Cross Ex. 2, when this pre-Exelon Pepco enthusiastically embraced new technological developments and developed an ambitious plan to make the grid of the future fully compatible with customer needs.

That’s the kind of distribution company that the District needs and currently has with Pepco but that it will relinquish if the Commission permits Exelon to acquire Pepco. Paragraph 129 of the Settlement Agreement, which addresses Formal Case No. 1130, is pathetically weak tea and, particularly in light of Exelon’s track record, offers no assurance of the “enthusiastic support” that the Commission and the District require.

Before Order 17947, the District Government and OPC raised urgent alarms over Exelon’s inherent conflict of interest, but they have apparently now been mollified by Exelon’s ability to use its money and influence to bend opinions. The Commission should not be swayed by such tactics. Exelon will always be able to overwhelm its under-funded opposition with saturation advertising, political contributions, a cadre of lobbyists, or by offering $25 million side deals for unspecified “naming rights” or the like. The Commission’s job is to protect the public interest, realizing that the decision in this proceeding will be “forever.” It would be imprudent and unconscionable to saddle customers with intolerable long-term risks in return for a few, quickly dissipated baubles.

As DC SUN advised the Commission on November 4, the accelerated schedule makes it impossible for DC SUN, with its limited resources, to conduct meaningful discovery, file supplemental testimony, or conduct productive cross-examination. Rather, DC SUN will rely on the comprehensive record that the Commission has already compiled – including the extensive testimony from customers – and on the Commission’s own interrogation of the Settling Parties’ witnesses. The Commission has demonstrated throughout this proceeding its ability to test assertions and to reach its own conclusions, and we are confident that it will do so with respect to the proposed settlement agreement.

The standard is clear – Order 17947 lays out the requirements and how the Commission will apply them in this proceeding. The Commission’s task now is to assess whether the proposed settlement agreement satisfies that standard. It does not.

Relying on Order 17947 and the abundant evidence in the record, DC SUN will show in its brief that the settlement agreement is deficient with respect to each of the seven public interest factors, and that the defects that led the Commission to reject the application before warrant rejection again.

With respect to Factor 1 and the so-called Customer Investment Fund, the “benefit” for customers is short-lived, at best, and completely illusory or inconsequential, at worst. The purported rate credit excludes the largest classes of customers (including the Federal Government) entirely and masks residential rate increases that will come home to roost in April 2019, producing unbearable rate shocks. The one-time bill credit of about $50 per customer is, by any measure, trivial, fleeting compensation for the long-term economic and environmental risks that those customers will be required to assume. Most of the remaining CIF payments will go to the District government where they will either displace taxpayer funds that would otherwise be used for those purposes or will – as with past earmarked funds – be subject to the Council’s reappropriation into the District’s general fund.

There is no evidence that this now-somewhat-larger CIF will provide any incremental benefit. Moreover, the increased CIF will still leave the District in the same unequal position vis-à-vis the other PHI jurisdictions because the most-favored-nations provisions in Maryland, New Jersey, and Delaware will ensure that the District’s share of the total CIF will be allocated based on the number of meters – not on an appropriate basis, either the local operating company’s sales, rate base, or net income. Nor will the settlement agreement assure any more long-term jobs than the earlier application that the Commission rejected. Indeed, a utility that supports and encourages competitive development of new-technology resources will create far more local jobs than proffered in this Settlement Agreement.

As to Factor 2, despite some window dressing, control of our utility will unequivocally rest with Exelon in Chicago. When vital corporate interests are at stake – like the interest in protecting merchant generation revenues – none of the settlement agreement’s provisions will prevent Exelon from exercising its will to the detriment of District customers. Unfortunately, the Joint Applicants chose not to submit supplemental testimony from Exelon’s CEO, Mr. Crane, PHI’s CEO, Mr. Rigby, or even Exelon Utilities’ CEO, Mr. O’Brien – the top executives who are most qualified to testify about the extent of Exelon’s control over Pepco. Those executives made it clear in earlier testimony, however, that Exelon will dictate key policies, and nothing in the settlement agreement renounces that testimony.

With respect to Factor 3, the settlement agreement’s reliability provisions will not provide material improvements over the Joint Applicant’s previous, rejected proposal. While some provisions were tightened up, the key fact remains – Pepco has made substantial reliability improvements, and reliability will improve due to DC PLUG whether PHI remains as a stand-alone utility or becomes an Exelon subsidiary. Nor does the settlement agreement or the testimony give any clue about how an Exelon utility will act differently or what Exelon will actually do that will produce greater reliability or safety.

For Factor 4, Exelon’s inherent conflict of interest cannot be completely cured by the ring-fencing provisions proffered in the settlement agreement, which are largely unchanged from the application that the Commission denied. The recent Energy Future bankruptcy proceeding in Texas provides a cautionary lesson that bankruptcy can displace even the most robust ring-fencing controls. Like Energy Future, Exelon is particularly susceptible to the vagaries of the energy market, and could well see the same fate. The settlement agreement’s purported fail-safe breakup provision offers no solace because by the time Exelon files for bankruptcy the damage will have been done, and the fate of Pepco may be within the province of the bankruptcy court, not the Commission. In any case, there is no way that Exelon’s acquisition of Pepco could provide a net benefit with respect to Factor 4 since the status quo – with no potential detriment from a conflicted parent company – is unambiguously preferable to the proposed merger.

With regard to Factor 5, the process we’ve all witnessed since the Commission issued Order 17947 demonstrates the difficulties that the Commission will face in attempting to regulate Exelon. Exelon has tried to use its disproportionate financial muscle – by blanketing the media in an attempt to manipulate public opinion, by making payments for nebulous “naming rights,” by dangling forthcoming political contributions, and by using charitable contributions to secure support – all this in an effort to displace the Commission’s order. The nuts and bolts of regulation will be more difficult as a result of the added layer above PHI, but, more importantly, Exelon will always be the largest elephant in the room, and it has shown in other jurisdictions how it seeks to achieve its corporate policy objectives through brute political influence rather than through transparent regulatory channels.

For Factor 6, the settlement agreement does not adequately address the Commission’s concerns about Exelon’s inherent conflict of interest and the affect it will have on distributed generation. Indeed, by putting Exelon in a preferred position for solar and micro-grid development, the settlement agreement exacerbates rather than alleviates those concerns. The settlement agreement is anti-competitive and would permit Exelon to stifle other interests seeking to develop new-technology resources that would stimulate a competitive market and provide greater benefit for customers.

Finally, with respect to Factor 7, there is no evidence that the settlement agreement will produce any incremental benefit over Pepco and the natural operation of a vibrant competitive market. First, as I noted, the CIF payments to the District, ostensibly for clean energy and sustainability, may not provide any net benefit because the funds will either replace funds that the District would otherwise spend, or they may simply be diverted to the District’s general fund.

Second, the settlement agreement’s interconnection provisions are virtually identical to those adopted in other jurisdictions and, at best, simply reflect minimum, prudent behavior. Moreover, Exelon Utilities’ CEO testified that he could identify no “best practices” that Exelon could bring to Pepco’s interconnection procedures and agreed that Exelon may actually learn more from Pepco than the other way around.

Third, the commitment to build between seven and ten MW of solar generation is illusory and even counterproductive for several reasons. This so-called commitment takes credit for the five MW of solar that DC Water has already been planning to install and that will likely be installed without Exelon if it makes economic sense; if the project doesn’t make sense, it won’t be built, with or without Exelon. No solar will be built under this provision unless Exelon receives what it considers “commercially reasonable terms” – in other words, unless it can make a profit. In short, nothing about the merger will change the economics of the Blue Plains Solar Project or any other solar project contemplated by the settlement agreement, and there will be no merger benefit above what will occur any way. Moreover, if Exelon builds this 7 to 10 MW of solar generation at commercially reasonable terms, it will displace competitive development from the private sector that would build it anyway because the market makes those installations worthwhile.

Fourth, Exelon’s commitment to purchase new or existing wind energy, capacity, and ancillary services located anywhere in the PJM territory will – like any new solar installation – merely meet existing RPS requirements and will not provide any incremental environmental benefit.

Fifth, the arbitrary commitment to develop four microgrids fails to provide a benefit for a number of reasons. It sidesteps this Commission’s regulation because it permits the costs to be recovered from customers through rates even though the Commission has made no determination whether the benefits of these facilities justify the costs or whether other alternatives would be more beneficial. It gives Exelon an unfair advantage in developing this emerging technology by keeping competitors out of the market, which will tend to stifle microgrid development or increase its costs. There is no evidence that Pepco could not provide exactly the same services as proposed by Exelon.

In sum, this proposed deal suffers from the same deficiencies that the Commission found in Order No. 17947 required it to reject the application as inconsistent with the public interest. DC SUN urges the Commission to be vigilant in scrutinizing the Settling Parties’ case. While this iteration of commitments marginally improves some aspects of the deal, like the CIF, it still falls far short of the Commission’s standards for a transaction that is in the public interest. The two key deficiencies that led the Commission to deny this application – the loss of local control and Exelon’s inherent conflict of interest – still loom as critical detriments to the public interest. The Commission should not risk the District’s electricity future and the welfare and security of our children and grandchildren by turning over our local distribution utility to an owner that will never be in sync with the District’s interests.

PHI’s CEO testified that Pepco can meet all of its customers’ needs without this merger but that he pursued a deal with Exelon because it provided shareholder value. If PHI believes that its shareholders need a substantial premium that can only be achieved through a sale, there are other suitable suitors. Exelon, however, comes with unacceptable baggage that creates intolerable long-term risks for customers and the District.

The Commission should again deny this application because it is not in the public interest.