Would be power-company partners still want to merge

The $6.8 billion deal that would unite electric utilities (and some gas suppliers) in

Philadelphia

; parts of

South Jersey; Wilmington; Baltimore;

and

Washington

has been stalled by District of Columbia regulators, who last week said the plan would enrich shareholders but would not help customers, as a utility deal should.

On Monday, Chicago-based Exelon Corp., which owns Philadelphia's Peco Energy Co., and Washington-based Pepco Holdings Inc., which owns Atlantic City Electric in South Jersey and Delmarva Power & Light in Newark, Del., among others, said they still want to hitch up, even after the D.C. Public Service Commission voted the marriage down, 3-0.

The company's defeat in the district - Commission Chair Betty Ann Kane and her colleagues said in a statement that the proposed merger "failed to show . . . any net benefit" to businesses or consumers in the Washington area - raises this question:

How did Exelon CEO Christopher Crane and his managers and deal-makers, after spending more than $200 million prepping for the merger and risking more than $200 million more in termination costs if the deal blew up, fail to anticipate and avoid this wall of resistance by their target's hometown regulator?

"The biggest credit issue emerging from the District of Columbia Public Service Commission's decision is how both management teams misread" the regulators, resulting in the "surprise" and embarrassment of this unanimous rejection, energy companies analyst Jim Hempstead wrote in a report to clients of Moody's Investors Service.

"We remain convinced the decision fails to recognize the substantial immediate and long-term benefits of our merger proposal to citizens, businesses and communities" in the district, the utilities said in a joint statement, saying they had promised to temporarily protect some jobs, keep payments low for poor people, and give money to charity if the deal went through.

"We will continue working to complete the merger," previously blessed by Delaware, New Jersey, and Maryland, the companies added.

Sounds as if Exelon took Pepco's hometown a bit for granted: Among other complaints, the district points out that New Jersey won job protections for up to five years, while Exelon promised Washington workers just two years.

Exelon and Pepco still say their deal would be good for the local economy, because by joining forces and cutting $1.3 billion in expenses over the next 10 years, they could hold the line on power price increases and have more left over for low-income power subsidies and charity gifts.

Though Exelon can still try to change the district commission's mind, Wall Street is not betting on victory: Pepco shares fell 16 percent and Exelon 7 percent when the decision was announced, and each slipped again Monday, remaining close to 18-month lows, after they pledged to try again.

Exelon's own shareholders could use some sweetening: The company has shown declining average annual returns over the last five years, compared with a robust 12 percent annual return for all Standard & Poor's 500 utility stocks.

Pepco has done better than Exelon since 2010, returning 14 percent a year, but that includes dividends the company has been funding with borrowed money, Hempstead pointed out.

"If Exelon throws in the towel and walks away from the transaction," Pepco investors "will face a painful dividend reduction," he concluded.

Exelon was already close to a credit-ratings downgrade "due to the ongoing weakness" of its Exelon Generation Co. L.L.C. subsidiary, especially since it agreed to borrow billions to buy Pepco, according to Robert Hornick, New York-based analyst at Fitch Ratings, which rates Exelon Generation BBB.

Though Exelon has been promising billions for acquisitions, "power and natural-gas prices have not improved," and the company's debt has escalated, Hornick added.

"If the D.C. regulator refuses to reopen the case," a federal court could take Exelon's appeal, but that will likely push back the merger's late October target date, according to Philip C. Adams, an analyst for Gimme Credit L.L.C.