Pepco-Exelon merger would create nation’s largest electric utility

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exelonThe proposed merger of Exelon Corporation and Delmarva Power owner Pepco Holdings Inc. would, if approved, create the largest electric utility holding company in the United States as measured by the number of customers, the federal Energy Information Administration reported.

The combined 8.5 million customers served by the new Exelon would surpass the number of customers served by the next-largest utility holding company, Duke Energy, which merged with Progress Energy in 2012, the federal agency reported. Currently, Exelon services 6.7 million customers through three electric utility subsidiaries: Commonwealth Edison (ComEd) in Chicago, IL; PECO Energy in Philadelphia, PA and Baltimore Gas & Electric (BGE) in Maryland. Exelon participates in every stage of the energy business, from generation (Exelon Generation) to competitive energy sales (Constellation) to transmission and delivery (BGE, ComEd, and PECO), the EIA reported.

Pepco Holdings currently serves 1.9 million customers. Its largest subsidiary is its namesake utility,  Potomac Electric Power  (Pepco), with customers in the District of Columbia and Maryland. Pepco Holdings also owns Delmarva in Delaware and Maryland and Atlantic City Electric in New Jersey.

Exelon proposed purchasing Pepco Holdings for $6.8 billion in April 2014. Exelon cited cost reductions available through increased scale and the two companies “geographic proximity and similar utility business models” as the primary reasons for the merger. Many U.S. investor-owned utilities (IOUs) have consolidated in recent years, often under the umbrella of a corporate holding company structure.

The transaction still needs approval from District of Columbia regulators, who earlier rejected the deal. Exelon returned with a revised offer regarding employment and other commitments.

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Giant utilities, such as  ComEd, Pepco, and BGE, are the primary providers of electricity to retail customers and are subject to state and federal regulatory oversight. Holding companies also have “firewalls” between regulated and unregulated operations. This includes blind bidding on a utility buying power on the wholesale market and the utility only passing through rates and not profiting from any spread between the cost of selling and buying power.

In states that allow retail competition, such as Delaware customers can often choose to receive their electricity supply (both generation and delivery services) from the traditional IOU, or they can choose a competitive retail power marketer to supply the generation required to serve their demand for power. In either case, the distribution of electricity continues to be managed by the IOU, and these delivery services are regulated by the state public utility commissions, the EIA reported.

Overall, electricity deregulation has been disappointment for retail customers who have not seen substantial savings, industry observers say. Large customers can gain savings.  Any savings are usually coupled with short-term price guarantees.

By contrast, Delmarva Power buys electric power under a number of contracts and staggered periods of time to reduce the chance of price shocks. Those shocks have been less frequent as generous natural gas supplies keep rates down.

However, critics claim that alternative energy mandates help make Delaware electric power too expensive and hurt poorer consumers.

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