Antitrust & Competition Laws

The System Works: D.C. Regulators Showed Courage in Rejecting Exelon’s Proposed Takeover of Pepco

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"Allison Fisher" "Public Citizen"Statement of Allison Fisher, Outreach Director, Public Citizen’s Energy Program

Congratulations to the D.C. Public Service Commission for showing courage today in rejecting Chicago-based Exelon’s acquisition of Pepco. The deal would have been bad for D.C. consumers, and the Commission was right to reject it – and refuse to succumb to Exelon’s extensive lobby campaign. Commissioners rightly listened to the many public interest voices opposed to the deal and determined that it failed to meet the District’s standard of public interest. It is heartening to see that the system works.

In rejecting the deal, D.C. regulators recognized that Exelon’s economic interest and business model are fundamentally incompatible with the District’s established policies of promoting renewable energy and localizing the generation of electricity, and that the potential harm of the merger to the District and its electric utility customers outweighed the benefit to shareholders – who would have received a $1.842 billion windfall had the merger been approved.

We applaud the Commission for basing its decision on the merits of this case. The District was the last jurisdiction to consider the merger and the only jurisdiction to reject it. While their colleagues in Delaware, Maryland and New Jersey yielded to corporate pressure and conditionally approved the takeover, D.C. regulators listened to the Office of People’s Counsel, four D.C. Councilmembers, 27 District advisory neighborhood commissions and more than 1,000 District residents – all of whom opposed the deal.

Ultimately, the conflict between what is good for Exelon and what is good for the District could not be resolved through stipulations and superficial fixes. At the end of the day, D.C. regulators chose what is best for D.C. residents. For this we commend them and congratulate the engaged D.C. citizenry who held them to it.

By Approving Exelon Takeover of Pepco, Maryland Public Service Commission Ignores Harm to Consumers and Clean Energy, Puts Corporate Profits Ahead of Public

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Statement of Tyson Slocum, Director, Public Citizen’s Energy Program

TysonSlocumsmNote: Today, the Maryland Public Service Commission approved the proposed merger between Exelon Corporation and Pepco Holdings, Inc. Public Citizen was an intervenor in the case before the commission.

Today, on behalf of our thousands of members who also are Pepco customers, we condemn the Maryland Public Service Commission for approving Chicago-based Exelon’s acquisition of Pepco. As an intervenor who also served as an expert witness in the proceeding, Public Citizen stressed that Exelon’s acquisition of Pepco would be bad for consumers and bad for clean energy. The commission should have stopped this power grab. Instead, it facilitated it.

In giving the deal the green light, the commission ignored the more than 1,500 Marylanders, the Maryland Attorney General, the Maryland People’s Counsel and nine Montgomery County Councilmembers who called on the commission to reject the merger and put people before corporate profits.

Despite the commission’s action today, this isn’t the end. For the deal to go through, the D.C. Public Service Commission (PSC) also must approve it. Already, the D.C. Office of People’s Counsel, four D.C. Councilmembers, 19 District advisory neighborhood commissions and more than 1,000 District residents oppose the deal. The D.C. PSC should heed their call to reject this bad deal for the public.

The proposed merger likely would lead to higher electricity rates and would make it harder for Maryland and the District to meet their renewable energy goals.

Instead of handing control of our electricity to a mega-corporation based in the Midwest, community leaders, regulators and lawmakers should work to ensure that we modernize the way we produce and use electric power. Our region’s electricity system should maximize cost-effective opportunities for households, small businesses and churches to lead the fight against climate change by generating their own electricity through rooftop solar panels.

Breaking up the Bank of America?

There is not one good reason to break up the Bank of America, the Charlotte-based giant with $2.1 trillion worth of properties that include Merrill Lynch and Countrywide Financial.

There are many good reasons.

As a shareholder, I submitted a resolution for a vote at the annual meeting May 6 that calls for the board of directors to study the merits of a break-up. Public Citizen, where I work as a financial policy advocate, has amassed more than 20,000 signatures in a petition supporting this proposal. Here are 10 reasons to support this study.

1. BoA’s stock trades at about $15 a share. Before this acquisition in Merrill Lynch, the stock traded above $50.

2.The company’s book value is greater than the stock value. If the company is liquidated, with the $2.1 trillion in assets sold to pay off the $1.86 trillion in liabilities (deposits, bonds, etc), this will leave a net of $240 billion. But the stock is only worth about $160 billion. Buy all the stock, liquidate the bank, and shareholders can earn more than $80 billion.

3. The company earns (in after-tax income) a paltry 0.23 percent on these $2.1 trillion in assets. Imagine a factory that costs $2.1 trillion that only returns 0.23 percent on that investment each year. Investors might consider Microsoft, which generates 18 percent on its assets. Much of this difference between Microsoft and BoA is explained by the bank’s massive $1.86 trillion in debt. After servicing that debt, there is little left for shareholders. But even among BoA’s peer mega-banks, that 0.23 percent return is poor. Wells Fargo returns 1.4 percent on assets.

4. BoA’s return on shareholder equity is also poor. It has not been above 5 percent since the Merrill Lynch acquisition. Before that, it often returned more than 15 percent. That 15 percent is close to what Wells Fargo returns currently.

5. One reason that BoA performs so poorly with all this money is that it is too big to manage. The company owns hundreds of subsidiaries. Undoubtedly, the CEO couldn’t list them all, let alone recite their specific business purposes.

6. The company miscalculated its regulatory capital by some $4 billion—not just for one year, but for five years. It has restated operating line results numerous times.

7. JP Morgan posts better figures and enjoys a better management reputation than BoA, but an analyst believes JPMorgan would be worth more to shareholders broken up as well. John Reed and Sanford Weil who merged Citibank and Travellers Group into Citigroup both now agree that Citi would be better broken up. They understand the impossibility of managing the daily operation and risks of such a behemoth.

8. General Electric decided to sell GE Capital—and the stock price rose by more than 10 percent on the news

9. BoA managers failed to prevent massive fraud. In August 2014, BoA agreed to a $17 billion settlement with the Department of Justice. Explained the DOJ, “Bank of America caved to the pernicious forces of greed and cut corners, putting profits ahead of their customers.” Shareholders funded that $17 billion settlement with the government, not those responsible for the fraud at BoA. That precedent can serve as an invitation for other BoA managers to flout the law as well if there’s no personal accountability.

10. BoA’s size isn’t necessary to serve large customers. BoA joins syndicates for large loans. Boutique Lazard Freres brokered the sale of Heinz to Berkshire Hathaway.

Bartlett Naylor is the financial policy advocate for Public Citizen’s Congress Watch division. 

5 Questions for the CEO Trying to Take Over Pepco

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March 30 marks the beginning of evidentiary hearings in Washington, D.C. on the controversial proposed acquisition of Pepco by Exelon.   exelon sm black x

The nearly $7 billion proposed acquisition, announced in April of last year, would give Exelon a near monopoly in the region and shower shareholders with a $1.8 billion windfall at the expense of Pepco customers and the District’s clean energy goals.

The hearings offer the opportunity for intervening parties to directly question Exelon and Pepco senior executives on the proposed deal. The first day of hearings will be occupied by cross-examination of Exelon’s CEO, Chris Crane.

Here are five questions Crane should be asked:

1)     Will you direct Exelon to use its political heft and influence to lobby against policies and initiatives that promote clean energy in the District?

With its ambitious clean energy goals and burgeoning rooftop solar movement, the District needs to know where Exelon stands.

Exelon is notoriously hostile to renewable energy – because renewable energy directly competes with the company’s fleet of nuclear reactors – and not shy about it. The company has been a leading voice against federal incentives for wind energy – leading to the Exelon’s ouster from the American Wind Energy Associations board. [i] At the state level, this overt opposition to clean energy plays out through direct lobbying to defeat bills like the modest community renewable bill introduced in Maryland last year (HB 1192)[ii] or the bill that would have enabled energy generation using poultry litter as a feedstock (SB 521).[iii] Notably, Pepco did not oppose either one of these efforts.

Another way is through direct lobbying to boost nuclear power, often at the expense of renewable energy. Last year, Exelon lobbied for a resolution (HR 1146) before the Illinois General Assembly that would have allowed the company’s nuclear plants in that state to receive “clean energy credits” just as solar and wind do. This essentially would have shifted support away from those renewables in favor of Exelon’s nuclear fleet, which comprise 52 percent of its generation assets.[iv]

2)     How many Pepco employees will lose their jobs as a result of the takeover?

Exelon plans to fire Pepco workers. Crane told reporters when the deal was announced last year that he plans “a reduction in the number of employees” at Pepco to create “synergies”.[v]

Backlash against the potential job losses forced Exelon to pledge not to fire any Pepco workers within the first two years of the merger and make a “good faith” commitment to hire more than 100 union workers in Washington, D.C., in the first two years after the deal is sealed. Evidentiary hearings in Maryland revealed that those new job commitments were actually additional hires to fill positions that will become vacant due to retirement.[vi]

3)     Why is this deal designed to line the pockets of shareholders and executives while shortchanging customers?

Pepco shareholders are the big winners if this takeover is pushed through. Exelon is paying more than twice Pepco’s value, which would give Pepco shareholders a $1.8 billion windfall.[vii] And shareholders aren’t the only ones who stand to gain from this deal. According to testimony of the D.C. government’s expert witness, John Wilson, Exelon intends to finance the deal on the backs of ratepayers and even walk away with an annual $50 to $56 million surplus, which Exelon plans to pocket instead of using to lower customer rates.[viii]

Meanwhile to appease regulators tasked with protecting customers in this deal, Exelon has offered a Customer Investment Fund that would give Pepco customers a one-time credit of $132, enough to cover only one electricity bill.

4)     Will Exelon seek to tax customers to fund the corporation’s charitable donations?

A recent Chicago Tribune investigative report found that a portion of each utility bill issued by Commonwealth Edison, Exelon’s Illinois based utility, included electricity delivery rates that were used for charitable donations. The utility’s donations totaled $60 million over the past eight years, “millions of dollars” of which were directed to the “politically influential” with “power to aid the state’s largest utility” or to those with “close ties to executives of ComEd or Exelon.”[ix] Exelon even shuttled Illinois ratepayer-funded donations to out-of-state charities in Maryland and Pennsylvania.

ComEd spent $10,000 of ratepayer money to help fund a 2012 cocktail reception where its chief executive Anne Pramaggiore received a “Woman of Achievement” award. World Business Chicago, Mayor Emanuel’s economic development group and whose board Chris Crane serves on, received $736,000 from customer bills. Ratepayers paid $27,000 for a 2013 golf outing hosted by members of the Illinois Legislative Black Caucus, the newspaper found.[x]

We’ve already seen how Exelon leverages charitable giving in the District. Exelon used its promise to continue the same level of giving awarded by Pepco to “encourage” recipients to attend public hearings on the deal and read statements of support for the merger.

5)     Why is Exelon unable to meet the District’s reliability goals?

Unlike Pepco’s current plan to reduce the number of power outages, Exelon’s commitment includes no targets for the next several years. Its proposal would not bind it to any reliability target until the end of 2020 – and even then, its goals are less stringent than the annual standards already proposed by Pepco, according to a brief filed by Maryland’s Energy Administration with the MD Public Service Commission. [xi]

Exelon expects customers to bear the costs of these little too little, little too late goals. In that brief, the Maryland attorney general noted that Exelon’s proposed reliability budget “is no more than a promise to seek Commission approval to raise rates even further if Exelon needs more money than it thought – which is likely.” [xii]

The hearing is open to the public and begins at 10 a.m. at the D.C. Public Service Commission – 1333 H Street NW.  Come let Exelon now we watching.

Allison Fisher is the Outreach Director for Public Citizen Energy and Climate Program

[i] http://www.politico.com/news/stories/0912/81008.html

[ii] http://www.citizen.org/documents/maryland-organizational-letter-opposing-exelon-merger.pdf

[iii] Initial Post-Hearing Brief of the State of Maryland and the Maryland Energy Administration, March 3, 2015, Page 32.

[iv] http://www.citizen.org/documents/maryland-organizational-letter-opposing-exelon-merger.pdf

[v] http://www.washingtonpost.com/business/capitalbusiness/pepco-agrees-to-be-sold-to-chicagos-exelon-in-x-billion-utility-deal/2014/04/30/f762cbb2-cfdb-11e3-a6b1-45c4dffb85a6_story.html

[vi] Initial Post-Hearing Brief of the State of Maryland and the Maryland Energy Administration, March 3, 2015, Page 54.

[vii] Direct Testimony of Michael L. Arndt, December 8, 2014, Page 30.

[viii] Direct Testimony of John Wilson, November 3, 2014, Page 8.

[ix] http://www.chicagotribune.com/business/ct-utility-charitable-contributions-0222-biz-20150222-story.html#page=1

[x] Id.

[xi] Initial Post-Hearing Brief of the State of Maryland and the Maryland Energy Administration, March 3, 2015, Page 2.

[xii] Id.

Exelon’s Takeover of Pepco: Setting the Record Straight

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On Wednesday, the Kojo Nnamdi Show focused on the controversial takeover of local utility, Pepco, by Chicago-based mega-utility Exelon. The show featured critics of the deal – Abbe Milstein, founder of Powerupmontco, and Tyson Slocum, director of Public Citizen’s Energy Program – who debated proponents of the merger – Jim Dinegar, president and CEO of the Greater Washington Board of Trade, and Wendy Stark, deputy general counsel for Pepco Holdings Inc.

Listen to the debate here.

With an assist by Maryland Attorney General, Brian Frosh, who called into the show to highlight the fundamental issues informing the state’s staunch opposition to the deal, critics made it clear that this deal is not in the public interest, but rather designed as a windfall for Exelon and Pepco shareholders and a safety net for a company plagued by a fleet of uneconomic nuclear reactors.

However, proponents were able to slip in some erroneous claims about the effects of the proposed takeover on area ratepayers. Let’s set the record straight.

Electricity will NOT be More Reliable Under Exelon

Proponents of Exelon’s takeover of Pepco maintain that having the “biggest kid on the block” control your local utility means more resources to address outrages and reliability. In fact, this deal, if approved, would give the biggest kid on the block a near monopoly in the Mid-Atlantic region and limit the ability of customers and regulators to compare, for instance, several area utilities reliability targets. In a brief filed with the Maryland Public Service Commission, Maryland Energy Administration’s expert put it this way:

“Comparing one utility against another helps the Commission to identify the full range of viable options and judge whether the option the utility selected or proposed was reasonable. Indeed, differences in position can help the Commission identify and understand the different approaches that are available … competition is critical as a means of seeing and comparing the technical, economic and regulatory alternatives within the context of a specific regulatory issue.”

Exelon’s takeover of Pepco would mean the dominance of one perspective and one way of doing things: Exelon’s way.

And far from improving reliable, the Maryland Attorney General reports that Exelon’s reliability commitments are in some cases less stringent than the annual standards already proposed by Pepco. Exelon has no engineering plan supporting its reliability targets and Exelon will likely seek rate increases to cover the cost of its plan – a scenario BGE customers are all too familiar with. After being acquired by Exelon in 2012, BGE customers have had their rates hiked four times at Exelon’s request for “reliability improvements.”

Exelon’s Nuclear Generation DOES Puts Ratepayers at Risk

Stark, representing Pepco, insisted that Pepco ratepayers will be insulated from Exelon’s risky fleet of nuclear reactors.

And when questioned about a bill Exelon is pushing in the Illinois Legislature that would help prop up the corporation’s uneconomical nuclear plants, she said that in fact, that bill was about leveling the playing field for all alternative generation. It’s not. The bill, which Chicago Business reporters call the “Exelon-only” bill, would cost customers an additional $300 million a year to pay for nuclear plants that otherwise can’t compete in the market – and it’s a preview of how Exelon wields its influence on state lawmakers.

Not only does Exelon seek direct ratepayer subsidies for its nuclear generation, but we also expect it to try to limit customer access to energy saving programs and more affordable generation that compete with nuclear power. In hearings before the Maryland Public Service Commission, the commission staff’s own witness stated that Exelon CEO Chis Crane:

“consistently alludes to energy efficiency, demand response, distributed generation, renewable energy and net-metering as being counterproductive to Exelon’s bottom line … Considering that Exelon believes these technologies are incongruous and disruptive to its business, it is my interpretation that encouraging the growth of such programs would be fraught with constant battles both with the implementation of EmPOWER Maryland, but also in maximizing the bidding of these resources into the capacity markets to offset costs to ratepayers. “

The bottom line is that Exelon’s nuclear fleet is in financial turmoil. To address the failing economics of nuclear power, Exelon is pursuing schemes to prop up these plants, maximize their returns and shield shareholders from the risks associated with their continued operation – all of which is in conflict with the best interest of electricity customers.

Asking for a Higher Customer Investment Fund is Extortion?

Approval of the takeover is contingent on Exelon meeting each state’s merger criteria, which, in the case of Washington, D.C., and Maryland, include a demonstration that the proposed deal will benefit consumers. As a way to clear this hurdle, Exelon has offered each affected territory a Customer Investment Fund (CIF). This money is used to provide one-time direct rebates to customers and in some cases a portion can be earmarked for investment in low-income and energy efficiency programs.

Exelon’s initial offering amounted to a one-time rebate of approximately $50 a household. This month, Exelon raised the CIF to a one-time credit of approximately $100 per customer. The CIF across all three affected states – Delaware, Maryland and New Jersey – and the District of Columbia now totals about $247 million. The Maryland Attorney General believes that the CIF is inadequate and does not constitute a fair benefit to customers.

Consider this: Exelon is attempting to buy Pepco for $6.9 billion, with Exelon paying every Pepco shareholder $27.25 per share, which will result into a $1.842 billion windfall for Pepco shareholders.

What Exelon is offering Pepco customers is a fraction of the $1.842 billion windfall for Pepco shareholders under the proposed acquisition. If the CIF for Maryland customers were equal to the windfall for Pepco shareholders, the CIF would be $731 million – though no one is advocating for that amount. Even so, considering Pepco ratepayers paid for Pepco’s transmission and distribution assets, Pepco’s customers are clearly ill-served by Exelon’s proposed paltry CIF.

Yet Dinegar of the Greater Washington Board of Trade called the request by advocates for a strong Customer Investment Fund, akin to “extortion.” I guess we know whose interest Mr. Dinegar is looking out for. I couldn’t help but be reminded by another corporate apologist that came to the defense of BP in the wake of the Gulf oil disaster. After the Obama administration secured a $20 billion fund to pay for damages from the catastrophic oil spill, U.S. Rep. Joe Barton (R-Texas) apologized to then-CEO, Tony Hayward, saying “I think it is a tragedy of the first proportion that a private corporation can be subjected to what I would characterize as a shakedown.”

That said, even a $731 million fund would be unlikely to lessen the long-term effects of Exelon’s undue influence and control over the region’s energy sector.

Learn more and take action on the proposed takeover.