Opinion

Why this huge utility merger is a threat to the climate

The Exelon-Pepco merger is an ominous sign of things to come

In 2012, a freak "derecho" storm downed trees across the Washington, D.C., metro area, leading to massive power outages. I lived in Silver Spring (a northern suburb) at the time, and my power was out for five full days. Pepco, the local electric utility, caught a lot of well-deserved flak for that fiasco, particularly after it paid its CEO over 11 million bucks that year.

But it looks like it's only going to get worse for Pepco customers. It turns out that a gigantic utility "holding company" called Exelon is attempting to buy Pepco. Last year, the two companies agreed to a $6.8 billion deal to merge, and are now sorting through various regulatory barriers to the deal.

This is a major problem not just for Pepco customers, who will likely be soaked by Exelon, but for climate policy in general. Bloated utility behemoths like Exelon will have to be fundamentally reformed or scrapped altogether in any realistic near-term attempt to roll back climate change, an effort that will largely take place at the state level.

David Roberts wrote a fantastic deep-dive post on the subject, which is definitely worth reading in full. But here are the major points:

1. Exelon will inevitably raise rates on Pepco ratepayers to cover for its crap nuclear plants...

2. D.C. has ambitious sustainability goals and Exelon is likely to impede them...

3. D.C. regulators would have much less control over Exelon than they do over Pepco... [Grist]

In short, it's bad for everyone but Exelon itself, and Pepco shareholders, who got a big boost in their shares when Exelon agreed to pay 20 percent above the going share price. And that was after Exelon won a fierce bidding war.

Why are they paying so much? As Roberts explains, a 2005 deregulation bill made it dramatically easier for holding companies to own both distribution utilities and power plants without being regulated as a normal utility monopoly (which is what Exelon is, legal chicanery aside). A wave of massive mergers ensued.

But technology did not stop progressing, and now some of these giant monopolies are looking down the barrel of innovations like distributed electricity generation, microgrids, renewable energy mandates, new regulations on coal, and so forth, all of which will be a necessary part of any climate policy. But these all threaten their traditional business model, in which giant centralized generators are hooked up to a large grid. This could mean huge losses on fixed investments (like nuclear plants) that were supposed to keep paying out for decades. So they're looking to pin down a big new source of customers who will have nowhere to turn, hoping to use them to subsidize the rest of their operation.

And that, in turn, is a big threat to climate policy. Right now, there's not a prayer of anything happening in Congress, but there are many promising local initiatives, including in D.C. and Maryland. And if Democrats ever get their act together at the state level, a lot more is possible.

As Roberts points out in a subsequent post, utilities are not all bad, and many are attempting to take advantage of new technologies. But the structure and size of many current ones inherently pushes them into trying to lock in the status quo. Thus, preventing this merger, as people in Maryland and D.C. are already trying to do, will be key for safeguarding current climate initiatives and preventing future ones from being foreclosed.

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