Exelon’s Takeover of PEPCO Makes Little Sense, Happens Anyway

Exelon, the Chicago-based holding company whose original legacy is Illinois’ Commonwealth Edison, recently closed on its purchase of Washington DC-based Potomac Electric Power Company (PEPCO). The transaction represented a $6.8 billion bet on the financial viability of utility conglomerates consisting of government regulated subsidiaries. Exelon already owns the utilities that service Baltimore (BG&E) and Philadelphia (PECO). The deal was all cash, with Exelon funding the purchase with $7.2 billion in bonds brokered by Barclays PLC and Goldman Sachs. Raising the money presented little problem for the energy giant, as the yields on the new 30-year bonds averaged about 2.2% above that of similar maturity U.S. Treasuries, or about 4.8%.

The problem is that the deal didn’t make any economic sense. PEPCO’s 2015 profit totaled about $327M on $5.02B in revenue. Assuming no structural costs savings in the deal, energy inflation is likely to wash out any rate generation savings as a result of Exelon getting a little bigger in total revenues. Interest on the $7.2B in bonds will run about $345M per year, which is greater than annual profit. Making the picture even gloomier is the fact that profits averaged only $121M annual from 2010 to 2014.

The deal didn’t make any sense for ratepayers and local governments either. The addition of $345 million in annual interest as well as an allocation of holding company operating expenses isn’t going to make PEPCO any more responsive and cost effective for ratepayers. PEPCO, so notoriously parsimonious with its aging infrastructure that summer thunderstorms and winter snow routinely knock out power for days and even weeks at a time for alternating portions of its service area, is unlikely to be easily squeezed for cost savings or rate increases without causing an uproar.

So how did Exelon convince governments and public utility commissions in Maryland and DC to back the acquisition? It was easy as pie. Donate a few million bucks to local governments, hire a few well connected former government officials as lobbyists, run a minor marketing campaign, promise $100 in one-time billing credits to each and every ratepayer, and call the acquisition a “merger of equals“. Seriously. They actually called it that.

The fact that every politician in on the deal–the mayor of Washington and county executives from influential Montgomery and Prince George’s counties, as well as the public utility commissions, state representatives, county councils, and U.S. representatives–is not likely to be in office when the true cost of the Exelon acquisition becomes apparent probably helped the cause.

Exelon even promised, with a tremendous amount of fanfare, that PEPCO’s service record would improve after the acquisition. Really. They said that.

What really bothers me is the fact that Washington DC’s electrical grid is going to be run from Chicago. Why would DC politicians, who had a hard time getting PEPCO management’s attention in spite of the fact that they were located less a that a mile from the White House, think that their influence will improve when dealing with faceless corporate professional managers more focused on rapacity than citizenship and whom are safely ensconced halfway across the country?

I guess we’re going to find out. I better go out and buy a generator.

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