The Merger

Influence, money fueled Exelon-Pepco merger

Tuesday, June 7th, 2016 

WAMU-FM and The Investigative Reporting Workshop at American University collaborated on this in-depth look at the Exelon-Pepco merger, including how much top stakeholders made. Reporter Patrick Madden contributed to this report. 


Last fall, D.C. Mayor Muriel Bowser boasted that a deal negotiated to back nuclear generator Exelon’s merger with Pepco would bring the District $78 million in financial commitments and a more dependable public utility. 

But by March she would do an about-face, declaring the final merger approved by regulators a bad deal for residents.  

In the intervening months, Exelon poured money into shaping opinion in the public sphere and in the corridors of city hall on a deal that would create the largest power company in the country. The companies used all of the tools at their disposal — advertising, lobbying and leveraging support from community organizations and key public figures — to advocate for the $6.8 billion deal.


Photo by Joe Warminsky, WAMU-FM

Mayor Muriel Bowser is interviewed last fall on the Kojo Nnamdi Show on WAMU by Nnadi, left, and Tom Sherwood of NBC4.

The merger of Pepco, which had no power generation facilities of its own, with a larger entity was likely an inevitable transaction, say industry observers. Bowser and other District leaders held out endorsements to win concessions for ratepayers but these were ultimately scrapped in the final deal approved by the city’s Public Service Commission. Meanwhile, executives with shares in the utility received huge payouts from the merger. Outgoing Chairman and CEO Joseph Rigby alone cashed out on $23 million in Pepco shares. 

Backers of the merger, including commissioners who approved the final deal, say it will bring new investments in the local power grid and tens of millions in benefits for the area — customers in Maryland received the first of two $50 rebates in April. However, those perks are a drop in the bucket compared to the payout for Pepco shareholders and the sums spent by the companies to complete the merger, many of which remain unknown thanks to limited disclosure requirements. 

Interviews and a review of public documents by the Investigative Reporting Workshop and WAMU show how money and advocacy shaped a back-and-forth debate that ended with a final product satisfying few of the District’s major players.  

Merger longtime coming

The PSC’s decision was the biggest hurdle to clear in the merger process. Before the commission had ever taken up the application, regulators in Virginia, New Jersey, Delaware and Maryland as well as the Federal Energy Regulatory Commission (FERC) had already approved the deal, which will affect 815,000 District residents and more than 2 million customers in the Mid-Atlantic. Pepco supplies power to D.C. residents as well as those in the close-in Maryland suburbs, and opposition was likely to be loudest and most concentrated in the District.

The utility said the spending on advertisements and other communications was done with the purpose of educating the public. And any individuals hired during the merger effort were employed because of their abilities to address that objective, said Vincent Morris, Pepco’s regional communications director.

"The ongoing communications and outreach efforts by Exelon and Pepco Holdings are meant to help inform D.C. citizens, businesses and policymakers about the enormous value our merger provides for customers, communities and the District,” he said in a statement to the Workshop and WAMU. “As part of this effort, Exelon has engaged consultants in the District to help us inform people about the merger benefits to District residents and to help us understand their priorities. All of these activities are funded entirely by shareholder dollars.” 

Critics warned the merger would make the utility harder to regulate, less accountable to the local community and most likely to request rate hikes. They also claimed the deal would undermine green energy goals staked out for the D.C. area by propping up Exelon’s fleet of nuclear generators and giving the company leverage to keep competition out of the regional utility grid. The company has promised to support those goals but has actively lobbied against federal tax credits important to the development of new renewable energy sources.

While mergers like this one are typically heavily scrutinized, the history of the utility industry is practically a history of mergers, said Roger S. Conrad, publisher of Conrad’s Utility Investor.

“It’s pretty much a scale business,” he said. “It’s an extremely capital-intensive business. Being bigger means that you can access capital more effectively, that you can deploy resources over a larger area.”

Recent years have seen significant merger activity in the public utility sector. Between 2010 and 2014, there were 18 such mergers. Congress in 2005 repealed rules restricting the mixing of utility and non-utility businesses and enforcing geographic concentration of utility companies. The Energy Policy Act of 2005 also moved oversight of electric and gas companies from the Securities and Exchange Commission to FERC and state regulators. The new regulatory framework was also written to give states more access to the books of utility holding companies.

Scott Hempling, an expert witness who opposed the Exelon-Pepco deal and a lawyer with decades of experience working on mergers, said access to those records hasn’t meant state regulators always do the best job scrutinizing mergers. And they are often unprepared for the full-court press of merger applicants.

“Very few states have actually cemented in place a vision of the kind of company they want before entertaining these cases,” Hempling said.

That means they push to extract benefits that don’t ultimately add up to much for local consumers, he said.

The stakes

Critics lined up to oppose the deal because of substantive concerns about its impact on the city — among them, fears over potential rate hikes. Opponents say ratepayers can expect huge price hikes over the coming year, pointing to the four rate hikes in five years approved by Maryland regulators for customers of Baltimore Gas and Electric (BGE), which was acquired by Exelon in 2011. The company in November requested what would be its fifth increase in six years. 

BGE had promised to seek new rate increases even before being acquired by Exelon, and Pepco, which hasn’t asked regulators to approve a rate increase since merger plans were announced in 2014, likely would have done the same, Bowser said. 

“We know that Pepco hadn’t come in for a rate increase (recently), so we expected they would even if the merger doesn’t take effect,” Bowser said in an interview with the Workshop and WAMU.

Larry Martin, secretary of the Grid 2.0 Working Group, one of the organizations against the merger, agreed with the mayor that rate increases were probably coming regardless. “This is what happens with Pepco and public utilities in general,” he said. With the merger approved, Pepco last month asked Maryland regulators for a 10 percent rate increase for customers in Montgomery and Prince George’s counties.

But Martin said Bowser stated her opposition to the PSC’s final order without taking any action to appeal the decision. 

“It sounds to me like maybe they’re having their cake and eating it, too,” he said.  

Bowser responded that the D.C. Attorney General's office represents the District government.  

Grid 2.0 in March appealed the PSC’s order approving the merger. DC Solar United Neighborhoods, Public Citizen, the DC Attorney General and the Office of People's Counsel and DC Attorney General the next month filed applications to reconsider the merger order. The commission has twice extended the original 30-day deadline to act on Grid 2.0's application for reconsideration. The final day for a ruling on the motion to reconsider the settlement is now June 22. 

Opponents also say that thanks to Exelon’s huge commitment to its nuclear power facilities, the merger’s approval endangers the commitments to a green energy future already staked out by the D.C. community and elected officials. 

Exelon executives have promised to maintain the District’s existing commitment to expanding sources of “green” energy like solar and wind. Yet despite being a top wind power generator, in recent years the company has actively lobbied on the federal level to kill tax credits for wind energy. Joseph Dominguez, the company’s executive vice president of policy and regulatory affairs, told GreenTech Media in 2014, “This year, it’s the wind industry. Next year, it will be the solar industry.”

Big power suppliers like Exelon didn't move aggressively over the last year to take on solar tax credits the same way they’d targeted support for the wind industry. The deal nonetheless worries green advocates from a competitive standpoint.

A costly process

Greater Washington Board of Trade President and CEO Jim Dinegar and other supporters of the merger argued that the District needed a company with Exelon’s resources to improve the area power grid. There’s no question it took the power generator significant financial resources to complete the merger process.

As first reported by the Washington Business Journal in February, Exelon had spent about $259 million through the end of 2015 in pursuit of the merger, according to filings with the Securities and Exchange Commission. That figure doesn’t include lobbying and advertising spending by the energy behemoth. And Exelon and Pepco haven’t skimped on those expenditures. In D.C., Pepco spent about $62,000 lobbying city officials last year, according to reports filed with the D.C. Board of Ethics and Government Accountability. While the companies couldn’t lobby the public service commission or other regulators directly, Tyson Slocum, director of Public Citizen’s energy program, said outreach to elected officials has an impact even when a policy decision rests with an appointed, nonpartisan body.

“These independent regulatory commissions are kind of like the Supreme Court, right? They obviously have one eye on the letter of the law, but regardless of what they say publicly, they are going to have one eye as well on which way the political winds are blowing,” he said.

Before candidates for local office began getting pressure to take a position on the merger, the list of connections between the utility and city officials was extensive.

Among individuals with ties to both the city and Pepco, Council Chairman Phil Mendelson owns about $17,500 in shares in the utility. The Board of Ethics and Government Accountability ruled in 2013 that Mendelson could vote on legislation involving Pepco without violating conflict-of-interest rules. Councilmember Vincent Orange is a former vice president for government affairs and lobbyist for the utility. Donna Cooper, a former Orange staffer, is now regional vice president at Pepco. And Councilmember Jack Evans took a job last year with Manatt, Phelps and Phillips, LLP, a law firm employed by Pepco to lobby D.C. government. In the mayor’s office, Bowser senior adviser Beverly Perry was a senior vice president at Pepco before retiring from the utility in 2013.

Perry held about 47,000 shares of Pepco Holdings stock as of last year. 

Including CEO Rigby, executives and board members at the utility when the merger went through cashed out stock options worth $51 million.


Photo by Kate Patterson for IRW

Sherice Muhammad, advisory neighborhood commissioner/activist, in Marvin Gaye Park in the Deadwood neighborhood of Washington, says residents "are not fooled" by the deal.

For activists like Sherice Muhammad, an advisory neighborhood commissioner serving Northeast D.C., the merger fight was defined by well-connected voices overriding the concerns of local residents without the same kind of platform.

“By and large, D.C. residents are not fooled by this deal,” Muhammad said. “It’s for the stakeholders of Pepco and Exelon. It’s for people who are brokers for the utilities. Those persons will be the benefactors but, unfortunately, we will be stuck with the tab.”

Exelon also drew unwanted attention for whom the company hired for the advocacy campaign. Earl “Chico” Horton III, the chairman of Bowser’s now-defunct Super PAC, registered with the Board of Ethics and Government Accountability in September as a lobbyist for Exelon. Horton said in a statement to WAMU and the Workshop that he only registered out of “an abundance of caution” that Exelon retained his law firm in order to represent the company in “strategic advisory and certain legal matters,” not to lobby. 

Bowser said those connections played no role in influencing the merger process. 

The merger campaign also received public backing from prominent former public servants and members of the business community. Dinegar and former mayor Anthony Williams, now CEO and executive director of the Federal City Council, put their names to a full page ad in a March Sunday edition of The Washington Post.

“The merger is too valuable for the District to lose,” read the message.

Williams is best known for his steady leadership after Marion Barry’s tenure as mayor. The Board of Trade is the area’s biggest business lobby. 

The amount the companies spent on messaging in print and on air is unknown and the companies have declined to specify a number. Political campaigns or nonprofits engaged in political advocacy must report their spending on television ads in the nation’s 50 largest media markets, thanks to a new rule introduced by the Federal Communications Commission in 2012. But Exelon wasn’t technically engaged in political spending.

Merger opponents say one of the most egregious examples of the role of money in the merger process was the naming deal involving the new D.C. United soccer stadium. Pepco agreed to pay the city $25 million for naming rights near the planned stadium. In a white paper produced last year, the environmental watchdog group said Pepco paid up front the equivalent of half the value of Verizon’s 20-year naming rights contract with the city, while only getting the naming rights to an adjacent street nearby. Bowser’s office has said negotiations for the naming rights deal were ongoing for years, long before the merger was even on the table. That hasn’t stopped critics like Anya Schoolman, executive director of the D.C. Community Power Network, from claiming that the deal is an example of pay-to-play politics.

“If you look at the history of naming rights deals, this is so out of scale with what companies typically do,” Schoolman said.

Before the companies opened their pocketbooks for supporting the merger, Pepco and its executives did so for local political campaigns. The utility donated more than $33,000 to PACs, campaign committees and constituent service programs between 2011 and 2015, according to an analysis of campaign finance data by the Workshop — almost a third of that to the D.C. Proud Inaugural Committee in 2014.

Pepco largely refrained from political donations last year, instead enlisting individuals like Horton and Williams and leveraging longstanding financial support of community groups into endorsements of the merger. More than 50 groups filed letters in support of the merger or praised Pepco as a community partner. Those organizations ranged from environmental education groups to local arts nonprofits and philanthropic organizations: among them, Wooly Mammoth Theater, the United Negro College Fund and the Capital Area Foodbank. Organized opposition to the merger at the Public Service Commission came almost uniformly from Advisory Neighborhood Commissions and a handful of environmental and green energy groups.


Photo by Kate Patterson for IRW

Mike Tidwell, executive director of the Chesapeake Climate Action Network, outside of his Takoma Park office. Hiis organization opposed the merger of Chicago-based Exelon with Pepco.

“Most polluting companies don’t have a natural constituency,” said Mike Tidwell, executive director of the Chesapeake Climate Action Network, a group involved in opposing the deal. “They don’t have a grassroots following. They don’t have a base. So they have to invent one.”

It’s not clear from IRS filings by the nonprofits or Pepco’s community foundation exactly how much annual support these groups receive from the utility. Morris of Pepco said the company’s longstanding relationships with nonprofit organizations in the District are built on mutual trust and commitment to improving the lives of residents.

“Over the course of the merger process, we actively shared with our nonprofit partners our commitments to enhance service, provide direct customer benefits, and importantly, to keep charitable giving at current levels for at least 10 years,” he said. “As a result, a diverse set of individuals and organizations, including District residents, business owners, faith groups and local nonprofits, chose to voice their support for the merger.’’

Objections to final deal

In February, the merger looked to be on the ropes. But in making a second rejection of the deal, commissioners surprised opponents by outlining several changes that would lead to an approval. Exelon and Pepco agreed to those new conditions in a March 7 filing opposed by the mayor, the D.C. attorney general and ratepayer advocates, plowing ahead without the backing of a coalition that had helped renew the merger push in October with the negotiated settlement.

Commissioner Joanne Doddy Fort joined Willie Phillips in voting for the revised deal. Commission Chair Betty Ann Kane voted against the merger. Left out of the final order: a guarantee of no residential rate increases through March 2019.

A spokeswoman for the commissioners said they would not comment on the merger process until after final appeals are exhausted. In an interview with the website Utility Dive, Kane said that the approved order failed to adequately address concerns about the potential entanglement of Pepco and Exelon businesses.

The commissioners who voted in favor of the merger insisted that serious benefits will come to the District that the city wouldn’t see otherwise. Phillips cited $25.6 million for rate offsets to be administered by the PSC, $14 million in customer rebates as well as funding for workforce development and green facilities.  

“These are real benefits, and I just think that it would have been a mistake and a missed opportunity for the District,” he told the site in March.

Even without the benefits negotiated by the mayor’s office, Conrad of Utility Investor said the company has made promises of an improved utility — and it will be judged on those.

“They’re going to be under pressure to make things happen,” he said.

The application process of the Exelon-Pepco merger has much in common with others that have been pursued elsewhere in the last two years. In Connecticut, Louisiana and Hawaii, purchasing entities have gone back to regulators after initial rejections of merger applications. The second time around, the holding companies looking to buy utilities sweeten the deal.

State regulators have already given their blessings to merger deals involving Louisiana’s Cleco and Connecticut’s United Illuminating. The Federal Energy Regulatory Commission, which must approve all such proposed mergers before they go through, also gave the nod to those deals last year after issuing its approval for the Exelon-Pepco deal in 2014 – decisions  in line with the history of utility merger applications considered by federal regulators. Hempling said over the last three decades, federal regulators have rejected only a handful of proposed utility mergers. And, increasingly, this is how merger acquisitions are completed.

But he questioned why power companies would spend large sums of both political capital and money to influence an administrative process that was nominally supposed to be decided based on the evidence.

“What does it say about your sense of civic morality that you would try to erode the credibility of what's supposed to be an evidence-based process just because you could? Just because the First Amendment says you could — just because you had the pile of cash to pay for it,” he said.

Photo of utility lines by Mike Fisher, flickr

The Merger

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Andrew Kreighbaum