Scott Hempling on Holding Company Mergers

Maryland utility attorney Scott Hempling has entered testimony at the DC PSC opposing the swallowing of regional distribution company PEPCo (owned by regional holding company PEPCo Holdings, Inc.) by multi-state holding company Exelon.  Here is a link to his testimony.

Note the list of conditions in the summary of Hempling’s conclusions starting on page 10.  The conditions detail exactly why it is not a good idea for PSCs to allow holding companies to swallow local utilities.  Keep in mind that PEPCo is itself a holding company.  Here is how the game of monopoly is played.  Either way, risk or cost is dumped on rate payers, just as both were dumped on WV rate payers in the FirstEnergy Harrison plant scheme.

PHI [PEPCo’s parent holding company] treated its franchise like a New York City taxi medallion—created by the government as a public good, converted by its owner to a private good and sold to the highest bidder.  But a utility franchise is not like a taxi medallion; it is not a private commodity. A utility franchise is an obligation to serve at “lowest feasible cost.”  Seeking the highest possible purchase price was inconsistent with that obligation. Nor did it produce the Commission-required “balancing” of shareholder and customer interests.  Worse, Exelon now must recover that acquisition premium, somehow: if not from Pepco’s customers (indirectly, by withholding merger savings), then from someone else’s customers—or by having its shareholders absorb it.  To the extent unrecovered, the premium increases Exelon’s financial risk—to Pepco’s detriment.
Hempling also sees the danger in subordinating local service to the business needs of multi-state holding companies:
By owning multiple types of businesses throughout the U.S., and by telling its share holders to expect “growth,” Exelon has put itself on a path of acquisitions and risk that is (a) unlimited by geographic or type-of-business, and (b) beyond this Commission’s control. As Pepco’s

role in Exelon diminishes (by a factor of five, compared to its role in PHI), the top-level attention given to its operations, its obligation to innovate, and its relationship with the Commission risks diminution as well. With (a) Pepco’s decision makers being subordinated to Exelon’s Board of Directors, (b) capital being scarce by definition, (c) Exelon’s decisionmakers seeking ventures with higher returns and higher risks,
(d) Pepco depending entirely on Exelon for equity investment, and (e) lenders taking Exelon’s risks into account when setting loan terms for Pepco, Pepco will be subject to conflicts it does not currently face with PHI.
In another recent essay, Hempling also demonstrates that the takeover of local utilities by multi-state holding companies is also a threat to the development of new decentralized power structures.  This essay is a must read for anyone who is interested in innovation and building local renewable power into the US electrical system.  Here is his conclusion:

To achieve cost-effective consumption, we need cost-effective supply.  Cost-effective supply necessarily includes distributed energy resources, because they empower consumers to manage both their consumption and their supply.  And for distributed energy resources to be cost-effective, they must be subjected to distribution-level competition.  But helping consumers control their own supply does not come naturally to companies that historically have controlled their customers’ supply.  And distribution-level competition is unlikely to be welcomed by companies that historically have been protected from competition.

Mergers of distribution monopolies—especially of adjacent companies poised to become each other’s worst competitive nightmare—head in the opposite direction.  Commissions have approved dozens of these transactions, paying no attention to their effects on distribution-level competition.  Today, the potential for distributed energy resources, provided competitively and cost-effectively, makes such study vital.

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