DC Public Power, a newly formed nonprofit group, filed a notice to regulators on Friday with its intent to buy Pepco’s Washington, D.C.-based assets as an alternative to Exelon’s proposed merger.
Architects of the deal say it would accrue nearly $1 billion in public benefits, and move the nation’s capital toward a locally-owned, customer-centric electricity grid. Speaking at a press conference, DCPP’s leaders said their nonprofit model is designed to embrace and encourage investments in new technologies, such as rooftop solar, energy conservation, microgrids and intelligent energy management systems.
“This is critical for the character and vitality of the city,” said John Chelen, DCPP board member and member of D.C.’s Ward 3 Democratic Committee. “D.C. can be a showcase -- what we do with technology here could be inspirational for other efforts around the country.”
The D.C. Public Service Commission rejected Exelon’s acquisition request in late August, putting a halt to the $6.8 billion merger with Pepco Holdings International (PHI) that spans several East Coast states.
"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," wrote Betty Ann Kane, chairman of the D.C. PSC, in her opinion. "The evidence in the record is that sale and change in control proposed in the merger would move us in the opposite direction."
On October 6, Exelon filed a motion to reopen the Pepco acquisition proceeding (FC 1119) to consider a settlement agreement backed by D.C. Mayor Muriel E. Bowser. On October 7, regulators opened a comment period on whether or not to accept Exelon's motion for reconsideration through October 16.
Following the PSC’s initial rejection, Chelen said that DCPP leaders presented Exelon with their divestment option to facilitate the merger in states that have already approved the plan. Exelon rejected the offer, however, saying it was too complicated.
“DCPP had in fact structured a proposal to be as uncomplicated as possible with the intent of facilitating Exelon and PHI’s ability to complete the merger as originally proposed,” said Chelen. “As we have all come to discover perhaps the real reason for Exelon and PHI’s demurral is they’ve been able to extract a better deal for them from the mayor and other city officials.”
Exelon’s new filing relies on an opaque non-unanimous settlement agreement, he added. A main component of the proposal -- $55 million dedicated to keeping electricity prices affordable for D.C. residents -- amounts to a deferred payment for Exelon that D.C. customers must repay with interest.
Critics say the merger would also link D.C. to Exelon’s aging generation assets, and tie Pepco to a generation-based business model. Regulators forced Pepco to divest from its generation resources in the 1990s in order to free the distribution utility from any stranded costs associated with large generating assets. Opponents say the merger would take Pepco back in time.
Exelon’s revenues are also tied to volumetric electricity sales, which opponents say puts the utility inherently at odds with distributed generation since it reduces the amount of electricity customers buy from the grid. DCPP is not bound to this revenue model.
But perhaps the most compelling part of DCPP’s proposal is that it will generate nearly $900 million in direct benefits to ratepayers over the next 20 years -- far outweighing the $78 million in benefits under Exelon’s settlement deal.
By moving from an investor-owned to a nonprofit model, D.C. will no longer have to ensure a rate of return, freeing up capital that isn’t debt-related or needed to pay for contracted services, explained Michael Siegel, DCPP co-founder and principal at Public and Environmental Finance Associates.
In addition, the nonprofit would be freed from paying federal taxes. These changes amount to roughly $900 million over 20 years, assuming a 3.5 percent discount rate.
Under this model, DCPP would serve as the grid operator and contract out for grid services. Leadership said they could contract with a company like Larry Kellerman’s Twenty-First Century Utilities, or even Exelon.
At just a few months old, the challenge for DCPP will be convincing D.C. residents and the PSC that the group has the expertise to run a municipal utility.
The stakes are high. Pepco D.C. represents about 20 percent the of $6.8 billion Exelon-Pepco merger, at a book value of $1.4 billion in March 2013. Michael Overturf, DCPP co-founder and manager of ZF Energy Development, said there’s already been strong interest from equity banks and private investors to secure Pepco D.C.’s assets in what would be a highly secure debt deal.
“People are ready to kill to get this,” he said.
DCPP leaders said that the group is in conversations with a wide variety of allied organizations and potential investors, but didn’t offer any names. When pressed, Overturf said that DCPP had raised “sufficient” capital to seriously consider purchasing Pepco, but refused to offer details. All financial material would only be revealed to the PSC upon request, he said.
Theoretically, no one should be opposed to this deal, Overturf added. It allows Exelon to move forward with its merger and gives D.C. more control of its energy future.
Attention now turns to the PSC, which must decide whether or not to hear Exelon’s motion to reopen the merger application, as well as whether or not to consider DCPP’s proposal. Because it is a late intervener, regulators could prohibit the group from participating in the proceeding.