Exelon Ends August with Gut Punches of Unknown Severity

Washington, D.C., August 26, 2015 – Chicago-based utility giant Exelon took two regulatory shots to the solar plexus at the end of August. Three of its nuclear plants failed to win in the PJM Interconnection’s newly-constituted capacity auction. Just days later, Exelon got a 3-0 thumbs down from the District of Columbia Public Service Commission for its $6.4 billion bid to  acquire Pepco Holdings, Inc.

Whether either event will have a significant impact on the Chicago-based company, one of the largest electric generators and distributors in the nation, is doubtful. The denial of the merger application could spell the end of the deal, announced in April 2014 as an all-cash offer, a $2.5 billion premium above Pepco’s market share. Pepco’s shares plummeted 17% when the District regulators announced their rejection of the deal. Exelon’s fell 3%.

The D.C. commission was the final hurdle for the deal, which had won approval from the Federal Energy Regulatory Commission, the Justice Department, and state regulators in Maryland, Delaware, New Jersey, and Virginia. Pepco Holdings, headquartered in Washington, serves customers in Maryland and Virginia through its Potomac Electric Power Co., in Delaware with Delmarva Power, in New Jersey through Atlantic City Electric. The Washington Post said the rejection by the PSC was “a major setback for the giant utility marriage.”

Exelon and Pepco have 30 days to appeal to the DCPSC. The utilities are likely to come back with an offer of increased financial and other benefits to the city and Pepco customers. The Post suggested that some city officials are open to an offer of more concessions from Exelon, although a strong consumer and environmental activist community is arguing against any compromise that would allow the merger.

The wording of the rejection by the regulators does not look promising for the two companies. Chairman Betty Ann Kane, long a fixture in D.C. Democratic politics (essentially the only politics in D.C.), said, “The public policy of the District is that the local electric company should focus solely on providing safe, reliable and affordable distribution service to District residences, businesses and institutions. The evidence in the record is that sale and change in control proposed in the merger would move us in the opposite direction.”

Exelon also suffered a blow at the capacity auction at the PJM Interconnection, based in Valley Forge, Pa., on August 21. Three of Exelon’s nuclear plants — Three Mile Island 1 near Harrisburg, Pa., Oyster Creek in New Jersey, and Quad Cities in Illinois – failed to offer winning bids in a capacity market that featured significantly higher prices than the last PJM sale. The annual auction was reconfigured this year after a bad winter caused price spikes and reliability issues.

TMI is an 850-MW unit (a twin to the infamous TMI 2 that melted down in 1979) located in the middle of the Marcellus Shale region that is producing copious amounts of low-cost natural gas. Oyster Creek is the oldest operating nuclear station in the U.S., with 637 MW of capacity. It was licensed to operate in 1969 and is scheduled to shut down in 2019. Quad Cities is a two-unit, 1,819-MW station that Exelon said is facing shutdown unless Illinois regulators can come up with a scheme to make it economically competitive in the wholesale markets into which it must bid its power.

Despite the inability of the three nukes to compete in the PJM capacity market, Exelon overall did well in the auction. The Philadelphia Inquirer reported that Exelon “has 28,000 megawatts of capacity in the PJM system, most of it located in PJM’s eastern and western zones, where the auction price settled at about 30% above the $165/megawatt-day that prevailed over most of the system. The price at last year’s auction was $120/megawatt-day. On Monday, Bloomberg Intelligence estimated that Exelon boosted revenue by $1 billion from the auction.”

Exelon’s Byron station, a two-unit, 2300-MW nuclear plant in Illinois, did clear the PJM auction. Exelon has listed Byron as among the plants it says are at imminent risk of closure for economic reasons. According to Crain’s, the plant will yield profits of around $26 million through 2019 as a result of clearing the PJM auction.