Office of the People’s Counsel’s Viewpoint on the Proposed Revised Settlement

October 2015

Overview• OPC’s history with mergers• OPC’s evaluation of the initial merger application• Commission’s August 25, 2015 decision• Post-order settlement discussions• Key Elements of the Settlement Proposal

– Customer Investment Fund & Rate Relief– Reliability– Sustainability Proposals– Local Jobs– Local Governance

• What’s next in the process?

2

OPC’s History with Mergers

•OPC has never been philosophically anti-merger.

• OPC’s position in Formal Case No. 951, the BGE merger filed in 1997, was that any merger application must meet the public interest standard.

• OPC was a signatory to the Pepco/Conectiv Merger in 2002 that created PHI (Formal Case No. 1002).

• The Formal Case No. 1002 settlement provided consumers with tangible benefits, rate relief, concessions for reliability, and a rate moratorium.

3

•Since the beginning of this case, OPC’s focus was to ensure the merger, if approved, would provide:

1) Meaningful and tangible benefits for consumers

2) Improved electric service reliability3) Promotion of rate affordability 4) Advancement of DC’s sustainability goals5) Jobs for DC residents

OPC’s Evaluation of the Merger

4

OPC’s Initial Evaluation of the Merger

• After a long and thorough evaluation by OPC’s team of technical experts, it was determined that the Joint Applicants’ application was deficient. There were many benefits for PHI’s shareholders and Exelon, but only marginal benefits for consumers.

• OPC opposed the merger application, as filed.

• Unlike the other three jurisdictions, early settlement discussions did not produce a settlement before the order was issued.

5

Commission Decision

• August 25, 2015 – the Commission denied the merger: Order No. 17947

• Major reasons for the denial:– Major benefits for shareholders and only minor

benefits for consumers– Direct and indirect risks for consumers – Electric service reliability proposal was deficient– No benefits advancing DC sustainability policies

6

Post-order Settlement Discussions

•Approximately three weeks after the merger was denied, OPC was approached by the DC Department of Energy and the Environment (“DOEE”).

•The revised settlement proposal presented more consumer benefits than the case presented by the Joint Applicants at trial and addressed the majority of the issues raised by OPC. However, the People’s Counsel still had concerns especially regarding whether consumers would receive more meaningful benefits including, rate affordability, enhanced reliability and promoting the District’s sustainability goals. The same concerns OPC raised at trial.

•OPC offered DOEE additional proposals to address our ongoing concerns which were communicated to the Joint Applicants.

•OPC was unable to discuss the terms of the settlement with consumers prior to the public release. By law, all settlement discussions are confidential.

7

Customer Investment Fund (CIF) &Rate Relief

• Initial JA proposal -- $14M CIF:

– increased to $33.75 M at trial– One-time bill credit OR energy efficiency programs OR low-

income energy assistance, subject to the PSC’s discretion.

• Settlement Proposal CIF -- $72.8 M– One-time bill credit $57 per account,– $25.6M rate increase offset (bill stability until March 2019),– $9M to support LIHEAP,– $400,000 2-year debt forgiveness for outstanding utility bills

8

Breakdown of the Customer Investment Fund

One-time rate credit 14,000,000 Rate increase offset 25,600,000 Renewable Generation 3,500,000 Energy Efficiency 3,500,000 Sustainability 10,050,000 LIHEAP 9,000,000 Energy Efficiency via NHT 6,750,000 2 year debt forgiveness 400,000

 TOTAL 72,800,000

None of the $72.8 Customer Investment Fund can be recovered in rates.

9

Additional Financial Benefit Local Workforce Development

Exelon will provide $5.2M to support local workforce development programs.

10

Arrearage Management Plan

The agreement also provides for the development of an arrearage management program for LIHEAP or RAD customers in arrears which will include credits or matching payments for customers who make timely payments on their bills.

11

Reliability• Original JA proposal – Pepco proposed to meet the Commission’s

reliability standards using an average method. OPC and PSC found this unacceptable as the average method rather than the annual method required by the Commission’s reliability standards. Even worse, the JAs would not commit to staying within current construction budgets.

• Settlement proposal – 1) Pepco will meet or exceed yearly reliability standards within budget or will be assessed non compliance penalties including: 1) a $63 thousand penalty for every $1 Million spent over budget, 2) penalties established in the existing PSC reliability regulations 3) additional non compliance penalties in the amount of $2 Million in 2018, $3 Million in 2019, and $6 Million in 2020, if they fail to meet the higher reliability standards to which they have agreed. They have also committed not to apply for a reduction in reliability standards for 5 years.

12

New Sustainability Proposals

Enhanced Interconnection Commitments

$6.75 million for affordable multifamily and master metered buildings (DC Gov’t & National

Housing Trust)

$10.05 million for the Green Building Fund

$3.5 million for the expansion of renewable generation

Procure 100 MW of wind energy

$5 million loan to the DC Government for the development of

renewable energy projects

$3.5 million to further energy efficiency efforts (SEU)

Develop 10MW of solar energy

Submit a proposal to build 4 microgrids

Benefits of Sustainability ProposalsEnhanced solar interconnection process supports the advancement of solar generation and helps to improve the city’s Renewable Portfolio Standard, which is currently significantly below the expected level. The enhanced process includes OPC’s recommendations to waive the $100 interconnection application fee and automate the application process which will result in a reduced interconnection time.

$6.75M to implement energy efficiency measures in affordable multifamily and master metered buildings as proposed by the National Housing Trust. This is a long-term benefit because it will help lower energy costs year round long after the money is spent.

$3.5M to further energy efficiency efforts of the SEU. All families regardless of income can implement energy efficiency measures to reduce energy costs year round. 14

Benefits of Sustainability Proposals

$10.05M provided to the District’s Green Building Fund to promote energy sustainability.

$3.5M provided to the Renewable Energy Development Fund or to one or more Community Development Financial Institutions to expand renewable generation.

$5M of capital to government entities to develop renewable energy projects.

15

Benefits of Sustainability Proposals

Exelon will develop 10MW of solar PV energy. This amount doubles the installations of solar PV in the District of Columbia. Ten additional MW of solar PV is a meaningful step forward in helping DC reach its RPS goals. Currently, the District has 9.1 MW of solar PV. Total Solar requirement for DC is 54 MW for this past year. Notably, this infusion of solar does not preclude other participants in the market.

Exelon will procure 100MW of wind energy. Wind energy is clean and it suppresses wholesale energy prices. Reduces the cost Pepco pays for electricity on the wholesale market thus reducing consumers’ costs.

Pepco will submit a proposal to build at least four microgrids in the District of Columbia. Microgrids increase reliability and improves the efficiency of the distribution network. There are currently no microgrids operating in the city.

16

Creation of Local Jobs• Original JA position - no net job losses at Pepco for 2

years.

• OPC advocated for a longer time period.

• Settlement Proposal - no net job losses at Pepco for 5 years.

• Exelon will relocate 100 employees and has committed to hire additional union employees.

17

Local Governance Concerns

• The Commission’s concerns regarding local governance:

1) Pepco’s voice and influence would be diminished within the Exelon corporate structure, and

2) Lack of independence on the PHI Board of Directors

The proposed structure would potentially harm Pepco and the ratepayers that it serves by diminishing Pepco’s role and its ability to make decisions that are responsive to the needs of its ratepayers and the policy directives of the District.

18

Pepco’s Presence in Exelon’s StructureUnder the proposal in the revised settlement:

1) Pepco will have a voice at the highest level of Exelon’s management. Specifically, the Pepco CEO:

- will be a member of the Exelon Executive Committee; - will meet with the Exelon CEO at least monthly;

- will have direct access to the Exelon CEO and Exelon senior management; and

- will attend meetings of the Exelon Board of Directors.

- will make decisions about rate cases, including the revenue requirement requested in rate filings with the

Commission.

19

Independence on PHI’s Board of Directors

2) PHI’s board of directors:- consist of seven or more people; a majority will be

independent directors (as defined by the New York Stock Exchange);

- at least one director will be selected from each of the service territories of PHI’s utility subsidiaries;

- at least one of the independent directors will reside in

the District of Columbia; and the CEO of Pepco will be one of PHI’s directors.

Taken together, these proposals make Pepco’s and PHI’s management structures stronger and more locally focused and provides a voice for Pepco at the highest levels of Exelon.

20

Measures to mitigate conflict between generation company and distribution company

• Exelon is required to adhere to the Commission's Codes of Conduct which will prevent Exelon from engaging in affiliate abuse that would include actions taken by Pepco giving preference to an Exelon generator.

• Exelon is required to remain in the PJM RTO until at least 2025. This serves as a disincentive for Exelon to leave PJM and require the Company to maintain independent transmission planning, operations and governance.

• Exelon will provide a contribution of $350,000 to fund the consumer advocates of PJM states (“CAPS”). CAPS advocates for local consumers at the wholesale level. Wholesale costs constitutes approximately 71% of the total consumer bill.

• Ring fencing provisions have been provided in the new agreement that serve to protect Pepco from potential risk or harm that Exelon’s other business activities may present, including bankruptcy and financial risks associated with their nuclear fleets.

21

Measures to mitigate conflict between generation company and distribution company

(cont.)

• Exelon agrees that the PJM Market Monitor may review its demand resource bids in PJM energy, reserves, and capacity markets.

• Exelon will require all of its affiliates to make all of their demand response (“DR”) program bid information available to PJM. This requirement will facilitate market transparency and prevent Exelon from using its DR bids in an anti-competitive fashion.

• On balance, while the conflict between Exelon’s business model as a generation business and Pepco's primarily distribution oriented business cannot be removed, Exelon's ability to act on this incentive in any anti-competitive fashion will be significantly reduced by the terms of this agreement.

22

Settlement BenefitsOverall, the proposed settlement addresses the Commission’s major concerns and provides a wide array of benefits for consumers and the

District of Columbia including reliability improvements, low-income energy assistance, advancing the city’s RPS goals, implements

widespread energy efficiency measures, increases opportunities for community solar and local

employment.23

What’s next in the process?The Commission will issue an Order to:

1) decide whether to review the settlement in the current case or direct the Joint Applicants to submit a new application,

and;

2) establish a procedural schedule which we have urged the Commission to allow for filed testimony by both the settling parties and opponents, discovery, a formal public interest hearing, briefs and an opportunity to receive public input.

24

Thank you!!

Office of the People’s Counsel(202) 727-3071www.opc-dc.gov

25