JOINT APPLICANTS DISTRICT OF COLUMBIA FORMAL CASE NO RESPONSE TO DISTRICT OF COLUMBIA GOVERNMENT DATA REQUEST NO. 3

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1 JOINT APPLICANTS DISTRICT OF COLUMBIA FORMAL CASE NO RESPONSE TO DISTRICT OF COLUMBIA GOVERNMENT DATA REQUEST NO. 3 QUESTION NO. 17 Q. REFER TO JOINT APPLICANTS (G)-5, ECONOMIC IMPACTS OF THE CUSTOMER INVESTMENT FUND AND THE ENHANCED RELIABILITY COMMITMENTS TO CUSTOMERS OF PEPCO AND THE DISTRICT OF COLUMBIA. A. HOW IS PEPCO GOING TO QUANTIFY WHETHER THE RELIABILITY BENEFITS HAVE BEEN ACHIEVED? EXPLAIN FULLY. B. IF PEPCO FAILS TO ACHIEVE THE RELIABILITY BENEFITS, WILL DISTRICT OF COLUMBIA RATEPAYERS BE COMPENSATED COMMENSURATE WITH THE BENEFIT ESTIMATES LISTED ON JOINT APPLICANTS (G)-5? 1) IF NOT, EXPLAIN FULLY WHY NOT. 2) IF SO, PROVIDE DETAILS ON THE COMPENSATION MECHANISM AND THE MEASUREMENT OF THE COMPENSATION. C. IDENTIFY THE SPECIFIC RELIABILITY TARGETS UPON WHICH EACH RELIABILITY BENEFIT ASSUMPTION ON JOINT APPLICANTS (G)-5 IS BASED. D. IDENTIFY AND PROVIDE THE SOURCE DOCUMENT FOR EACH RELIABILITY TARGET IDENTIFIED IN THE RESPONSE TO THIS DATA REQUEST, PART 3-17(C). E. HOW IS PEPCO GOING TO MEASURE WHETHER THE NUMBER OF DISTRICT OF COLUMBIA JOBS LISTED ON JOINT APPLICANTS (G)-5 ARE ACTUALLY PRODUCED? EXPLAIN FULLY. F. HOW IS PEPCO GOING TO COMPENSATE DISTRICT OF COLUMBIA RESIDENTS IF THE JOB INCREASES LISTED ON JOINT APPLICANTS (G)-5 ARE NOT PRODUCED? EXPLAIN FULLY. G. HOW IS PEPCO GOING TO ASSURE THAT THE JOBS LISTED ON JOINT APPLICANTS (G)-5 GO TO DISTRICT OF COLUMBIA RESIDENTS? EXPLAIN FULLY. H. HOW IS PEPCO GOING TO ASSURE THAT THE JOBS LISTED ON JOINT APPLICANTS (G)-5 ARE LOCATED IN THE DISTRICT OF COLUMBIA? EXPLAIN FULLY. RESPONSE: Page 19 of 65 5

2 JOINT APPLICANTS DISTRICT OF COLUMBIA FORMAL CASE NO RESPONSE TO DISTRICT OF COLUMBIA GOVERNMENT DATA REQUEST NO. 3 A. A. As explained in Dr. Tiemey's direct testimony on pages 21-22, Pepco has committed to performance outcomes that are "measured by a set of quantifiable metrics". The reliability benefits that Dr. Tierney has calculated are based on the outcomes to which Pepco has committed. For additional detail on the metric values that the commitment is based on, see Table SFT-3. B. Please see Dr. Tierney's response to DCG C. Please see Table SFT-3 in Dr. Tierney's Direct Testimony. Additionally, see Attachment A to AOBA D. See Dr. Tierney's response to subsection C, above. E. Dr. Tierney is not aware of any plans by Pepco to measure the number of jobs produced as a result of the merger beyond the information she has provided in her direct testimony. F. Dr. Tierney is not aware of any plans by Pepco to compensate District of Columbia residents beyond the Regulatory Commitments discussed in her direct testimony. G. Dr. Tierney's calculations using the IMPLAN model estimate the number of jobs created through the Customer Investment Fund and the Enhanced Reliability Commitments within the District of Columbia. Dr. Tierney is unable to identify which of those jobs are filled by residents of the District of Columbia and which are filled by non-residents. Dr. Tierney is not aware of any plans by Pepco to assure that the jobs created in the District of Columbia are filled by residents. H. The IMPLAN datafile that Dr. Tierney utilized is specific to the District of Columbia. Thus, the jobs that are reflected in Joint Applicants (G)-5 are located in the District of Columbia. SPONSOR: Dr. Susan F. Tierney Page 2 of 65 51

3 BEFORE THE PUBLIC SERVICE COMMISSION OF MARYLAND IN THE MATTER OF THE MERGER ) OF EXELON CORPORATION AND ) Case No.: CONSTELLATION ENERGY GROUP, INC. ) ) DIRECT TESTIMONY OF SUSAN F. TIERNEY, Ph.D. May 25,

4 In the Matter of the Merger of Exelon and Constellation Case No.: Direct Testimony of Susan F. Tierney, Ph.D. DIRECT TESTIMONY OF SUSAN F. TIERNEY, Ph.D. 1 I. INTRODUCTION AND QUALIFICATIONS 2 Q. PLEASE STATE YOUR FULL NAME AND BUSINESS ADDRESS. 3 A. My name is Susan Fallows Tierney. I am employed at Analysis Group, Inc., Huntington Avenue, 11h Floor, Boston, Massachusetts, Q. WHAT IS YOUR POSITION? 6 A. I am one of Analysis Group's Managing Principals. 7 Q. PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND 8 TRAINING. 9 A. I hold a Ph.D. in regional planning (198) and a.masters in Regional Planning (1976), 1 both from Cornell University. I was an assistant professor for 3.5 years at the University I1 of California at Irvine, and taught last year on a part-time basis at the Massachusetts 12 Institute of Technology. 13 Q. PLEASE DESCRIBE YOUR PROFESSIONAL EXPERIENCE. 14 A. I have been involved in issues related to public utilities, ratemaking and regulation, and 15 energy and environmental economics and policy for over 25 years. During this period, I 16 have worked on electric and gas industry issues as a utility regulator and 17 energy/environmental policy maker, consultant and expert witness. For the past 15 years, 18 I have been a consultant and advisor to private companies and governmental and other 19 organizations on a variety of economic and policy issues in the energy sector. Prior to 2 joining Analysis Group in July 23, I was a consultant at Lexecon, Inc., and its -1-53

5 In the Matter of the Merger of Exelon and Constellation Case No.: Direct Testimony of Susan F. Tierney, Ph.D. 1 Board of Directors; a member of the Advisory Council of the Independent System 2 Operator - New England; a representative to committees of the North American Electric 3 Reliability Council; a member of the National Academy of Sciences' Committee on 4 Enhancing the Robustness and Resilience of Electrical Transmission and Distribution in 5 the United States to Terrorist Attack; and a member of the U.S. Secretary of Energy's 6 Electric Reliability Task Force. My complete vita is attached as Exhibit SFT-1. 7 Q. HAVE YOU PREVIOUSLY SUBMITTED TESTIMONY BEFORE STATE OR 8 FEDERAL BODIES? 9 A. Yes. Although I have never testified before the Maryland Public Service Commission 1 ("Commission"), I have testified before utility regulatory agencies in many other states, 11 the Federal Energy Regulatory Commission ("FERC"), the U.S. Congress, several state 12 legislatures, arbitration panels, and federal and state courts. 13 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? 14 A. I have been asked by Exelon Corporation ("Exelon"), Constellation Energy Group, Inc. 15 ("Constellation"), and Baltimore Gas and Electric Company ("BGE") (together, the 16 "Applicants") to provide testimony on the direct and indirect economic and policy 17 benefits of the proposed merger. At the request of the Applicants, I have reviewed the 18 entire Application and have familiarized myself with the commitments the Applicants are 19 making to the customers of BGE and to Maryland in support of the request for the 2 Commission's approval of the proposed merger. 21 Q. WHAT ARE YOUR OVERALL CONCLUSIONS ABOUT THE ECONOMIC 22 BENEFITS OF THE PROPOSED MERGER FOR BGE CUSTOMERS AND THE 23 ECONOMY OF MARYLAND? -3-54

6 In the Matter of the Merger of Exelon and Constellation Case No.: Direct Testimony of Susan F. Tierney, Ph.D. A. As I describe in detail in my testimony below, I conclude that the Application offers the 2 following benefits to BGE customers and to Maryland: Table SFT-1 mary of Overall Benefits of the Proposed Merger Benefits Type of Estimated Economic Benefits Associated with to: Benefits Merger Commitments to Maryland: BGE Tangible, One-time $1 credit on the bill of every BGE residential customer (total customers quantifiable estimated value is $112 million) benefits $5 million contribution to Maryland's Electric Universal Service Program for the benefit of BGE's low-income customers n $4 million contribution to BGE's EmPOWER Maryland program for the benefit of BGE customers Other Current BGE distribution rates expected to remain in place at least through benefits the 4`" quarter of 212 n n BGE customers receive the benefit of synergy savings to BGE in future rate cases with post-merger test years Potential reliability and customer-service benefits from the sharing of best practices among the distribution companies of the merged company Maryland Tangible, Direct and indirect effects of the combined merger commitments: economy quantifiable n Over 2,44 new jobs benefits. Over $25 million in new income Other benefits n n Approximately $32 million in added value Approximately $1 million in incremental tax benefits to the State of Maryland and local communities in Maryland Support for Maryland's four major energy-policy goals of energy efficiency, renewable energy development, greenhouse gas emission reductions, and green jobs: n Continued presence of a major corporation with strong sustainability goals Construction (or renovation) of a LEED-certified building (35,- 5, square feet) - one of the largest LEED buildings in the Baltimore area n A new 25 MW renewable energy project in the state - raising by 35 percent the amount of installed wind capacity in Maryland as of 21 n n $1 million for the Baltimore area's electric vehicle ("EV") program, supporting such things as EV charging stations and 125 EVs $4 million for EmPOWER Maryland (7% of recent program spending on energy efficiency by BGE) (also a direct benefit to BGE customers) Support for community and charitable organizations in Maryland: n $7 million on average per year for 1 years ($7 million) Other employment benefits: New jobs/positions in Baltimore in the merged-company's competitive energy business -4-55

7 In the Matter of the Merger of Exelon and Constellation Case No.: Direct Testimony of Susan F. Tierney, Ph.D. 1 chose to specifically discuss those singular impacts on BGE customers as a separate piece 2 of analysis and in a separate portion of my testimony, below. 3 B. ASSESSMENT OF THE IMPACTS OF THE MARYLAND COMMITMENTS 4 ON BGE CUSTOMERS 5 Q. PLEASE DESCRIBE THE WAYS THAT THE CUSTOMERS OF BGE WILL BE 6 DIRECTLY AFFECTED BY THE PROPOSED MERGER. 7 A. There are several aspects of the proposed merger that will result in direct, tangible, and 8 measurable benefits to BGE customers. Together, these amount to approximately $121 9 million in direct benefits that will flow to BGE customers in 212 if the merger is 1 approved and consummated. 11 The Maryland Commitment with the most direct benefit to BGE customers is the 12 one-time credit of $1 to every residential customer buying electric and natural gas 13 service from BGE, a $112 million value. For context, this commitment equates to 14 roughly three weeks of "free" bundled electricity service (or three months of free electric 15 delivery service) for a typical residential electric customer.7 Alternatively, it reflects 16 approximately 1.5 months of free natural gas bundled service (or nearly four months of 17 free gas delivery service) to a typical residential customer.8 From the Applicants' ' This assumes that average bills for a residential BGE electric customer are as follows: delivery service at $396 per year, or $33 per month; and bundled electric service at $1,584 per year, or $132 per month. These estimated rates are for the 12-month period from June 211-May 212, and are based on the assumption of no change in base rates (for distribution charges) and known supply rates for standard offer service customers. Source: the Applicants. The $1 on-bill credit to each residential customer could also be seen as approximately one-fourth of the typical residential electric customer's annual delivery charges, or 6 percent of his/her typical total annual electric bill. s This assumes that typical bills for a residential BGE natural gas customer are as follows: delivery service at $36 per year, or $3 per month; and bundled gas service at $84 per year, or $67 per month. These estimated rates are for the 12-month period from June 211-May 212, and are based on the assumption of no change in base rates (for distribution charges) and estimated gas supply rates using BGE's most recent forecast of gas

8 In the Matter of the Merger of Exelon and Constellation Case No.: Direct Testimony of Susan F. Tierney, Ph.D. y ' rates. Source: the Applicants. The $1 to each residential gas customer represents over 27 percent of the typical residential gas customer's annual delivery charges, or approximately 12 percent of the total typical annual residential natural gas bill. This payment represents approximately 117"' of the total funds ($37 million) expected to be collected from all of the state's customers in 211 for the program. Source: Executive Summary of the Maryland Department of Human Services, Family Investment Administration, Office of Home Energy Programs, "Electric Universal Service Program Proposed Operations Plan for FY 211," submitted to the Maryland Commission, June 1, 21, page 1. Maryland Department of Human Services, Family Investment Administration, Office of Home Energy Programs, "Electric Universal Service Program Proposed Operations Plan for FY 211," submitted to the Maryland Public Service Commission, June 1, 21, page perspective, this commitment exceeds the estimated BGE synergy savings from the 2 proposed merger (as discussed in the testimony of the Applicants' witness, Mr. Ronald 3 DeGregorio). 4 A second commitment with positive value to BGE customers is the offer of 5 financial assistance to low-income customers. Exelon has committed to providing a 6 one-time, $5 million payment to Maryland's Electric Universal Service Program 7 ("EUSP"), which will directly support BGE low-income customers and help to retire 8 arrearages.9 In 29, EUSP arrearage forgiveness grants averaged $936.1 If we assume 9 an average grant size of $1, Applicants' $5 million payment could provide funding 1 for 5, additional arrearage forgiveness grants to be awarded. Conceptually and from 11 an economic point of view, this contribution could be viewed as income to BGE's low- 12 income customers, who collectively will have access to an additional $5 million in that would not otherwise be available. Additionally, the proposed contribution will 14 benefit all BGE customers because the contribution will likely reduce BGE's bad debt 15 and uncollectable expenses. 16 The Maryland Commitments provide a third tangible benefit to BGE customers: 17 program funding for BGE's energy-efficiency measures. Exelon has committed to

9 In the Matter of the Merger of Exelon and Constellation Case No.: Direct Testimony of Susan F. Tierney, Ph.D. 21 Third, potential reliability and customer-service benefits: The Applicants BGE expenditures on energy efficiency as part of the EmPOWER program totaled approximately $58 million in 21. Source: BGE. 1 provide $4 million to BGE's "EmPOWER Maryland" program. This will provide 2 participating customers the benefit of adopting technologies to become more energy 3 efficient, with $4 million in funding support that does not come from BGE customers. 4 This represents approximately 7 percent of the program spending on energy efficiency by 5 BGE in Q. ARE THERE OTHER BENEFITS THAT BGE CUSTOMERS WILL RECEIVE, 7 ON TOP OF THE $121 MILLION YOU DESCRIBE ABOVE? 8 A. Yes. There are other less measurable but still-important benefits that will flow to BGE 9 customers if the merger is approved and goes into effect. 1 First, the Applicants have indicated there will be no new rate case during the 11 course of this merger review. As a practical matter, this means that current BGE rates 12 for electric and gas distribution service will remain in place at least through the fourth 13 quarter of an assurance that does not now exist. 14 Second, BGE customers will receive the benefit of synergy savings to BGE in 15 the future. In future rate cases with test years after the merger is consummated, BGE's 16 cost of service will be lower than it would otherwise have been in the absence of the 17 merger; this is the effect of the incremental synergy savings from the merger (net of costs 18 to achieve those savings) that arise in time. BGE customers could be seen as getting the 19 benefits of synergy savings twice: once in the form of the immediate $1-per- 2 residential-customer credit in 212; and then again in rates in future years

10 In the Matter of the Merger of Exelon and Constellation Case No.: Direct Testimony of Susan F. Tierney, Ph.D. 1 expect to share best practices across the three distribution utilities that will be part of the 2 merged entity, with opportunities for improvements for BGE operations and for its 3 customer service. 4 C. ASSESSMENT OF THE ECONOMIC IMPACTS OF THE MARYLAND 5 COMMITMENTS TO MARYLAND 6 Q. IN ADDITION TO THOSE MEASURABLE DIRECT BENEFITS AND LESS 7 MEASURABLE BENEFITS TO BGE CUSTOMERS (WHO, OF COURSE, 8 RESIDE IN MARYLAND), ARE THERE OTHER BENEFITS TO THE STATE'S 9 ECONOMY AND TO THE BALTIMORE COMMUNITY? 1 A. Yes. I examined these other benefits through my IMPLAN analysis, to which I referred 11 above. 12 Q. BEFORE YOU DESCRIBE THE SPECIFIC ECONOMIC IMPACTS OF THE 13 DIFFERENT PIECES OF THE MERGER PACKAGE, PLEASE SUMMARIZE 14 THE RESULTS OF YOUR ASSESSMENT. 15 A. The Maryland Commitments will result in substantial economic benefits for the 16 Maryland economy. These various benefits derive from the infusion of dollars and/or 17 new personnel into the local economy. 18 Some of the direct benefits derive from additions to income (such as in the $1 19 per residential customer or the $5 million provided to low-income customers through the 2 EUSP contribution). Other direct benefits result from external investment in a project or 21 activity in Maryland (such as the LEED building or the new renewable project). 22 Most of the monetary value of the initial Maryland Commitments constitutes 23 direct benefits, since the money comes into and remains in the state's economy. The

11 JOINT APPLICANTS DISTRICT OF COLUMBIA FORMAL CASE NO RESPONSE TO DISTRICT OF COLUMBIA GOVERNMENT DATA REQUEST NO. 3 QUESTION NO. 35 Q. REFER TO THE PEPCO HOLDINGS, INC. SCHEDULE 14A, PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AND THE PRELIMINARY PROXY STATEMENT, SUBJECT TO COMPLETION, DATED JULY 21, 214 THAT WAS ATTACHED TO THAT SEC FILING. PAGE 9 STATES: "HOW DOES THE PER SHARE MERGER CONSIDERATION COMPARE TO THE MARKET PRICE OF OUR COMMON STOCK PRIOR TO THE ANNOUNCEMENT OF THE MERGER? "THE PER SHARE MERGER CONSIDERATION REPRESENTS A PREMIUM OF APPROXIMATELY 19.6% TO THE CLOSING PRICE OF OUR COMMON STOCK ON APRIL 29, 214, THE LAST TRADING DAY PRIOR TO THE PUBLIC ANNOUNCEMENT OF THE PROPOSED MERGER. THE PER SHARE MERGER CONSIDERATION REPRESENTS A PREMIUM OF APPROXIMATELY 29.5% TO OUR 2-DAY VOLUME WEIGHTED AVERAGE SHARE PRICE AS OF APRIL 25, 214, THE THIRD BUSINESS DAY PRIOR TO THE PUBLIC ANNOUNCEMENT ON APRIL 3, 214 OF THE PROPOSED MERGER." A. HOW MANY PHI COMMON SHARES WERE OUTSTANDING ON EACH OF THE FOLLOWING DATES: 1) APRIL 24,214? 2) APRIL 29, 214? 3) APRIL 3, 214? B. WHAT DOES THE "PREMIUM OF APPROXIMATELY 19.6% TO THE CLOSING PRICE OF OUR COMMON STOCK ON APRIL 29, 214" EQUATE TO IN DOLLAR MARKET VALUE OF PHI COMMON STOCK? SHOW CALCULATIONS. C. WHAT DOES THE "PREMIUM OF APPROXIMATELY 29.5% TO OUR 2- DAY VOLUME WEIGHTED AVERAGE SHARE PRICE AS OF APRIL 25, 214" EQUATE TO IN DOLLAR MARKET VALUE OF PHI COMMON STOCK? SHOW CALCULATIONS. RESPONSE: Page 47 of 65 51

12 JOINT APPLICANTS DISTRICT OF COLUMBIA FORMAL CASE NO RESPONSE TO DISTRICT OF COLUMBIA GOVERNMENT DATA REQUEST NO. 3 A. A. PHI Common Shares Outstanding: 1) April 24, ,2,958 2) April 29, ,25,51 3) April 3, ,14,375 B Premium of 19.6% to closing stock price on April 29, 214: Premium Computation: Merger Consideration Price 4/3 Closing Price 4/29/14 Premium Amount per Share Dollar Market Value of Premium Premium Amount per Share Number of Shares Outstanding 4/3 Dollar Market Value of Premium $ ,14,375 $1,12,86,73 $27.25 $22.79 $ % C Premium of 29.5% to 2 day volume weighted average share price as of April 25, 214: Premium Computation Merger Consideration Price 4/3 2 day volume weighted average price as of 4/25/14 Premium Amount per Share $27.25 $21.4 $ % Dollar Market Value of Premium Premium Amount per Share Number of Shares Outstanding 4/3 Dollar Market Value of Premium $ ,14,375 $1,559,581,729 SPONSOR: Carim V. Khouzami Page 48 of

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16 Ring-Fencing Commitments 1) RF Holdco Ownership of BGE: BGE shall remain a direct, wholly-owned subsidiary of RF HoldCo. 2) BGE Ring-Fencing: Exelon, RF HoldCo, BGE and EEDC shall ensure continued and ongoing compliance with the ring-fencing requirements applicable under Condition Numbers 2, 4, 5, and 6 of Commission Order No in Case No Exelon shall not, for three years following consummation of the Merger, be permitted to file with the Commission a petition for a modification to the ringfencing measures, and, after three years, may only do so if there is a material change in circumstances. 3) Non-Consolidation Opinions: Within 18 days after consummation of the Merger, Exelon shall obtain new non-consolidation opinions from outside counsel to BGE and Exelon concluding that a bankruptcy court, following established legal precedent, would not substantively consolidate: (i) the assets and liabilities of RF HoldCo with those of Exelon or EEDC in the event of an Exelon or EEDC bankruptcy; or (ii) the assets and liabilities of BGE with those of (a) RF HoldCo in the event of an RF HoldCo bankruptcy, or (b) Exelon or EEDC in the event of an Exelon or EEDC bankruptcy. If, for whatever reason, the Applicants are unable to obtain an acceptable opinion letter, Exelon and BGE shall take whatever additional measures are necessary to secure this letter. 4) Requirements Associated with Corporate Reorganizations: Exelon shall not engage in an internal corporate reorganization relating to RF HoldCo, BGE, or EEDC for which Commission approval is not required without 9 days prior written notification to the Commission. Such notification shall include: (i) an opinion of reputable bankruptcy counsel that the reorganization does not materially impact the effectiveness of BGE's existing ring-fencing; or (ii) a letter from reputable bankruptcy counsel describing what changes to the ring-fencing would be required to ensure BGE is at least as effectively ring-fenced following the reorganization and a letter from Exelon committing to obtain a new nonconsolidation option following the reorganization and to take any further steps necessary to obtain such an opinion. Exelon will not object if the Commission elects to open an investigation into the matter if the Commission deemed it appropriate, but may complete the reorganization prior to the conclusion of the Commission's investigation if Commission approval is not otherwise required. Exelon shall not, without prior Commission approval, engage in a reorganization relating to RF HoldCo, BGE, or EEDC if that reorganization would be inconsistent with Commission Order No or would prevent BGE from obtaining a new non-consolidation opinion. This provision does not negate or alter any statutory authority the Commission may otherwise have with respect to such reorganization, including pursuant to Public Utilities Article 6-15, and does not apply to transactions such as changes in capitalization or ownership of subsidiaries of EEDC other than RF HoldCo and BGE (e.g., ComEd and PECO)

17 or acquisitions or dispositions of utilities or utility assets other than RF HoldCo and BGE. 5) Maintain EEDC's Corporate Character: Exelon shall not, without prior Maryland Public Service Commission approval, alter EEDC's corporate character to become a functioning corporate entity providing common support services for EEDC subsidiaries. 6) ComEd and PECO Independence from BGE: At no time post-merger shall BGE directly or indirectly own or control, or have any direct or indirect interest in or management or operation of, CornEd or PECO. 7) Reporting on Exelon Utilities: Exelon shall report to the Commission on a quarterly basis the activities of Exelon Utilities until the completion of BGE's first rate case following consummation of the Merger and shall file such reports thereafter as the Commission deems appropriate. Each report shall include: (i) a narrative description of the activities undertaken by Exelon Utilities; (ii) cost data for Exelon Utilities; (iii) the basis on which Exelon Utilities' costs are proposed to be allocated to BGE; and (iv) a cost-benefit analysis assessing the utility of Exelon Utilities and its benefits to BGE. Market-Power Mitigation 8) Structural and Behavioral Remedies: In addition to divesting H.A. Wagner, C.P. Crane, and Brandon Shores Generating Stations (the "Generating Stations"), which shall be divested as a group, as well as the additional mitigation measures identified on pages of Exhibit JDP-1, Exelon shall comply with the IMM Settlement terms identified in the filing with the Maryland Public Service Commission made by Monitoring Analytics, LLC on October 11, 211 and attached to this Order as Attachment A. If the animal waste facility required by the Joint Settlement is considered dispatchable by Exelon and PJM rules, Exelon agrees that this facility will be added to the list of peaking facilities covered by the IMM Settlement. In accordance with the agreements reached with Anti-trust Division of the United States Department of Justice, Exelon shall enter into contracts to divest the Generating Stations no later than 18 days after consummation of the Merger, and then will close on the divestitures no later than 3 days after the receipt of all regulatory approvals, including the receipt of the Federal Energy Regulatory Commission's approval under Section 23 of the Federal Power Act. Exelon shall provide notice to the Commission of any dispute regarding the IMM Settlement, and shall file a request for approval with the Commission for any proposed modification to the terms of the IMM Settlement. Given that the Applicants' membership in PJM is an implied commitment in the IMM Settlement, continued membership in PJM is a condition of Merger approval. The Commission shall have the authority to enforce the IMM Settlement. Exelon's activities in satisfaction of Condition 1, "New Generation," provide additional market-power mitigation

18 STATE OF ILLINOIS ILLINOIS COMMERCE COMMISSION Public (Redacted) City/CUB Exhibit 4. WISCONSIN ENERGY CORPORATION, INTEGRYS ENERGY GROUP, INC., PEOPLES ENERGY, LLC, THE PEOPLES GAS LIGHT AND COKE COMPANY, NORTH SHORE GAS COMPANY, ATC MANAGEMENT INC., and AMERICAN TRANSMISSION COMPANY LLC Application pursuant to Section 7-24 of the Public Utilities Act for authority to engage in a Reorganization, to enter into agreements with affiliated interests pursuant to Section 7-11, and for such other approvals as may be required under the Public Utilities Act to effectuate the Reorganization. DOCKET No Direct Testimony and Exhibit of On behalf of City of Chicago and the Citizens Utility Board November 26, $RUBAKER &ASSOCIATES, INC. Project

19 Public (Redacted) City/CUB Exhibit 4. Page 1 Direct Testimony of 1 Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 2 A. My business address is 1669 Swingley Ridge Road, Suite 14, 3 Chesterfield, MO Q WHAT IS YOUR OCCUPATION? 5 A I am a consultant in the field of public utility regulation and a Managing Principal of 6 Brubaker & Associates, Inc., energy, economic and regulatory consultants. 7 Q PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND EXPERIENCE. 8 A This information is included in Appendix A to my testimony. 9 Q ON WHOSE BEHALF ARE YOU APPEARING IN THIS PROCEEDING? 1 A I am testifying on behalf of the City of Chicago ("City") and the Citizens Utility Board 11 ("CUB"). 12 Q WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? 13 A My testimony addresses the testimony and application submitted by Wisconsin 14 Energy Corporation ("WEC"), Integrys Energy Group, Inc. ("Integrys" or "TEG"), 15 Peoples Energy, LLC, The Peoples Gas Light and Coke Company ("PGL"), North 16 Shore Gas Company ("NS"), ATC Management Inc., and American Transmission 17 Company LLC ("Joint Applicants").' 'All data request responses ("DRR") I relied on will be served on the parties in response to the Joint Applicants' Data Requests to all parties. BRUBAKER &ft$pciates, INC.

20 Public ( Redacted) City/CUB Exhibit 4. Page 2 18 Q PLEASE SUMMARIZE YOUR RECOMMENDATIONS AND CONCLUSIONS. 19 A My recommendations and conclusions are summarized as follows: 2 1. The regulatory mechanisms currently applied to PGL and NS stabilize revenues 21 and enhance the market value of PGL and NS. This revenue stability provides 22 greater cost recovery assurance and enhances cash flow stability This enhanced market value contributed toward Integrys getting a premium to its 24 intrinsic value in the proposed acquisition. The Joint Applicants should provide 25 benefits to customers comparable to the value enhancement created by these 26 regulatory mechanisms Recognizing the added market value and cash flow benefit to investors created by 28 regulatory mechanisms, I believe it is appropriate to require a five-year freeze in 29 base rates to create a benefit to retail ratepayers as a condition of reorganization 3 approval. 31 A five-year rate freeze would not limit PGL's and NS's ability to use their current 32 approved rider mechanisms. I believe this is a balanced benefit given the ability 33 of PGL to achieve the stated goal of creating a more efficient company via the 34 proposed reorganization, and at the same time to recover most of its capital 35 investments (with a return) through rider mechanisms, and to produce savings 36 from the reorganization, based on consolidated operations and service company 37 arrangements The Joint Applicants have proposed to exclude any reorganization integration or 39 consolidation costs from their cost of service in setting rates. I believe this an 4 appropriate target and appropriate commitment. However, the commitment 41 should be expanded to include any severance packages provided to any 42 executive officers or employees of the Joint Applicants. No costs associated with 43 WEC's proposed acquisition/merger with Integrys ("Transaction") or the 44 reorganization integration should be subject to recovery from retail customers in 45 the ratemaking process as a condition of the merger The financing structure of the proposed Transaction may create limitations on the 47 utilities' ability to fund planned capital expenditures designed to ensure public 48 safety and service reliability. The reorganization financing structure will create 49 significant pressure on WEC to withdraw cash from its utility companies in a 5 sufficient amount to meet the increased financial obligations caused by the 51 reorganization. 52 The Joint Applicants should commit to ring-fence protections to ensure that PGL 53 and NS are able to fund their infrastructure investment and operations and 54- maintenance programs before they increase dividend payments to WEC. In 55 particular, adequate funding for prompt completion of PGL's Accelerated Main 56 Replacement Program ('AMRP") must be assured. This commitment should be a 57 strong commitment that allows the Illinois Commerce Commission ("ICC") to 58 invoke penalties on the Joint Applicants or limit PLG/NS dividend payment 59 authority, if dividend payments above authorized levels are made prior to a utility BRUBAKERASSOCIATES, INC.

21 Public ( Redacted) City/CUB Exhibit 4. Page 3 6 funding its AMRP, and the AMRP achieves its timeline commitment. This 61 ring-fence protection should remain in effect as long as the Qualifying 62 Infrastructure Plant ("QIP") rider program is in effect The Joint Applicants' proposed commitments are so heavily conditioned, 64 contingent, and lacking in specifics that they have dubious value to ratepayers, 65 the Commission, or Illinois. The claimed benefits are not concrete and are 66 unquantified, making valuation of their worth virtually impossible. In addition, the 67 claimed benefits and commitments generally do not include meaningful 68 enforcement mechanisms that assure claimed ratepayer benefits will be realized. 69 I. Revenue Stability 7 Q WHAT RECENT CHANGES IN REGULATORY MECHANISMS HAVE OCCURRED 71 IN THE STATE OF ILLINOIS THAT REDUCE THE RISK ASSOCIATED WITH THE 72 RECOVERY OF CAPITAL INVESTMENTS FOR GAS UTILITIES? 73 A Public Act added Section to the Public Utilities Act ("Act"). Section of the Act authorizes some Illinois gas utilities, including PGL, to file a tariff 75 for a surcharge that adjusts rates and charges to provide for recovery of costs 76 associated with QIP investments. PGL plans to use this rate mechanism in order to 77 support its AMRP. 78 Joint Applicants witness Allen Leverett states that the AMRP is a 2-year 79 program, which PGL has implemented to replace cast iron and ductile iron gas mains 8 and services, to upgrade its distribution system from low pressure to medium 81 pressure, and to relocate gas meters from inside facilities to outside facilities by PGL asserts that it will make material annual investment in these main 83 replacement programs, over the next 2 years.2 The qualifying QIP capital 84 investment is more than 7% of the total capital investments Integrys management 85 plans over the next five years. 2 Direct Testimony of Allen Leverett (Joint Applicants Ex. 1.) at 18. BRUBAKERSOCIATES, INC.

22 Public ( Redacted) City/CUB Exhibit 4. Page 4 86 Q HAS PGL'S RIDER QIP BEEN APPROVED BY THE COMMISSION? 87 A Yes. On January 7, 214, the Commission approved PGL's request to implement its 88 proposed Rider QIP in Docket No The QIP surcharge will allow PGL to 89 recover a return on and of investments for: (1) the costs to install facilities to retire 9 cost iron/ductile iron gas distribution facilities; (2) gas meter relocation costs to move 91 meters from inside customers' premises to outside; (3) the cost of upgrading the gas 92 distribution system from a low pressure system to a medium pressure system, 93 including installation of high-pressure facilities to support the upgrade; (4) the cost to 94 replace high-pressure transmission pipelines identified as at higher risk of failure; 95 and (5) the cost to install regulator stations to establish over-pressure protection. 96 Further, each year PGL can file a petition seeking a reconciliation of QIP costs 97 and recovery in a reconciliation proceeding. In the petition, PGL must support the 98 accuracy and prudence of its qualifying infrastructure investment. 99 Q DOES THE RIDER QIP PROVIDE REVENUE STABILITY TO PGL? 1 A Yes. Under PGL's 2-year program to replace gas infrastructure in the City of 11 Chicago, PGL expects average annual investments over the next five years of 12 *** *** 3 13 WEC notes in a November 214 investor presentation, the Rider QIP 14 surcharge will provide "Immediate earnings as infrastructure investments are made 15 (return on and of capital costs)."4 Since the cost recovery will occur outside of rate 16 cases, the QIP will reduce regulatory lag for recovery of capital investments and 17 provide revenue stability to the Company. PGL's QIP rider mechanisms for assured 3Suppiemental Direct Testimony of Scott J. Lauber (Joint Applicants Ex. 5.) and Joint Applicants Exhibit 4.1 Confidential. 4Wisconsin Energy Corporation presentation, November 214, at page 29. BRUBAKER Sft SOCIATES, INC.

23 Public ( Redacted) City/CUB Exhibit 4. Page 5 18 recovery of and on PGL's increasing rate base (due to AMRP) is a major element of 19 the utility's premium value to the acquiring firm, WEC. 11 Q HAVE CAPITAL MARKET PARTICIPANTS RECOGNIZED THE RISK REDUCTION 111 FEATURES OF THE QIP? 112 A Yes. In a report on Integrys, Value Line stated that the existence of new regulatory 113 mechanisms in Illinois will allow PGL to support earnings growth without filing rate 114 increases, even as it pursues its large AMRP capital program. 115 On the gas side, the utilities in Illinois expect to spend $2.2 billion- 116 $2.6 billion over a 1-year span to replace gas mains beginning in They will be able to earn a return on these expenditures without 118 having to file a general rate case Q DOES THIS REVENUE STABILITY DISTINGUISH THE ACQUISITION OF PGL 12 FROM OTHER RECENT ACQUISITIONS? 121 A Yes. For example, Rider QIP was not available during the acquisition of Nicor Gas by 122 AGL. Thus, this rider increases PGL's revenue stability as compared to that of Nicor 123 Gas in that acquisition. 124 In its November 214 presentation to investors, Integrys highlighted several 125 innovative ratemaking mechanisms that reduce its risks. Integrys informed investors 126 that recent approval of the QIP Rider will reduce risk for PGL, enhancing the risk 127 reduction from implementation of a bad debt rider in 29, storage service rider, 128 implementation of a decoupling mechanism in 212, and the existence of a rider to 129 recover manufactured gas plant site cleaning cost. All of these rider mechanisms 13 shift the risks of cost recovery from Integrys investors, to PGL and NS ratepayers. 5 Value Line Investment Survey: "Integrys Energy," December 2, 213. BRUBAKERIt SOCIATES, INC.

24 Public ( Redacted) City/CUB Exhibit 4. Page This risk shift occurs because the various regulatory mechanisms allow for more 132 frequent rate changes -- and in some cases reconciliations that provide PGL and NS 133 assurance of full cost recovery, but increase rate instability for customers to provide 134 this assurance to utility shareholders. The net effect is a risk reduction for PGL and 135 NS, and enhancement of the value of Integrys stock. Integrys stock benefits because 136 as risk is reduced, investor-required returns are lowered, to reflect the more stable 137 and predictable cash flow outlook for these two utility companies. 138 Q HAS THE REVENUE STABILITY PROVIDED TO PGL BY RIDER QIP IMPROVED 139 THE MARKET VALUE OF TEG? 14 A Yes. Standard & Poor's ("S&P") has noted positively the risk reduction aspects of the 141 Illinois regulatory mechanisms in place at both PGL and NS. Concerning PGL, S&P 142 states as follows: 143 PGLC also benefits from several other regulatory mechanisms that 144 mitigate potential cash flow volatility and reduce regulatory lag. These 145 alternatives to traditional base rate case applications include an 146 infrastructure surcharge, a bad-debt tracker, riders for recovery of both 147 environmental cleanup and energy conservation costs, and a 148 decoupling mechanism And concerning NS, S&P states as follows: 15 NSG also benefits from several other regulatory mechanisms that 151 mitigate potential cash flow volatility and reduce regulatory lag. These 152 alternatives to traditional base rate case applications include bad-debt 153 trackers, riders for recovery of both environmental cleanup and energy 154 conservation costs, and decoupling The existence of these regulatory mechanisms supports the gas utilities' 156 "Excellent" business outlook, reduces cost recovery uncertainty, and hence their 6Standard & Poor's RatingsDirect: "Summary: The Peoples Gas Light & Coke Co.," April 8, 214 at 3. 'Standard & Poor's RatingsDirect: "Summary: North Shore Gas Co.," April 8, 214 at 3. BRUBAKERp SOCIATES, INC.

25 Public ( Redacted) City/CUB Exhibit 4. Page credit standing and lowers their investment risk. This risk reduction benefits investors 158 and enhances the value of PGL. 159 Q WILL INTEGRYS'S INVESTORS RECEIVE FAIR COMPENSATION AS PART OF 16 THE PROPOSED REORGANIZATION TRANSACTION? 161 A Yes. Indeed, Integrys's own consultant estimated that the consideration to Integrys 162 shareholders represents a**' **" premium to the prevailing intrinsic value of 163 Integrys stock.8 Regulatory mechanisms implemented in Illinois, which substantially 164 stabilize revenue collections for PGL and NS, provide material consideration to 165 Integrys's shareholders as part of this proposed reorganization transaction Proposed Rate Freeze 167 Q DID THE JOINT APPLICANTS PROPOSE A RATE FREEZE ASSOCIATED WITH 168 THIS PROPOSED REORGANIZATION? 169 A Yes. Joint Applicants witness Allen Leverett proposes a two-year rate freeze if the 17 Commission approves this reorganization. Mr. Leverett says the Joint Applicants' 171 proposal for a two-year base rate freeze is conditioned upon all the utilities' existing 172 riders and automatic adjustment clauses, including Rider QIP, remaining in effect 173 during the rate-freeze period. However, Mr. Leverett wants a utility option that would 174 give PGL and NS the right to request a waiver from this base rate limitation, on a 175 perceived threat to the financial integrity of PGL and NS.9 8Confidential & Proprietary attachment to Joint Applicants' Response to City of Chicago Request No. 9.2, Integrys Energy Group Board Book, June 21, 214, page 281 of 344, Lazard "Pro Forma Impact Analysis: Intrinsic Value." 9Direct Testimony of Allen Leverett at 21. BRUBAKER* SOCIATES, INC.

26 Public ( Redacted) City/CUB Exhibit 4. Page Q DO YOU BELIEVE A TWO-YEAR RATE FREEZE IS APPROPRIATE GIVEN THE 177 PROJECTED BENEFITS TO WEC AND INTEGRYS SHAREHOLDERS CREATED 178 BY THIS ACQUISITION? 179 A No. With the riders in effect, the expected combination of the Joint Applicants' 18 service company, and a reasonable expectation of producing some synergies from 181 the creation of this larger company, I believe a two-year stayout period is simply not 182 long enough. 183 Q PLEASE EXPLAIN. 184 A PGL has implemented the QIP Rider and can increase its distribution rates by as 185 much as 4% per year under this rider. Further, PGL and NS have risk-reducing rider 186 mechanisms including bad debt riders, decoupling riders, fuel cost recovery riders, 187 and riders regarding manufacturing gas plant site cleanup. As I explained earlier, 188 each of these riders provides added value for shareholders, by imposing added 189 burdens on utility ratepayers. Without protective actions by the Commission, that 19 added value could flow to the acquiring company's shareholders, rather than 191 enhancing the utilities' ability to provide safe, reliable infrastructure and adequate, 192 least-cost service. With all these riders in effect, the Joint Applicants should be able 193 to defer an increase in base rates for a longer time period. 194 Further, over 7% of PGL's planned capital expenditures will be subject to 195 recovery through Rider QIP. The remaining increase in capital investments will 196 largely match the depreciation expense already reflected in current rates. For 197 example, in 213, PGL and NS reflected over $1 million and $1.5 million 198 (respectively) of depreciation and amortization. Recovering this amount of annual 199 depreciation expense will reduce rate base, and the non-qualifying QIP investments BRUBAKERtp SOCIATES, INC.

27 Public (Redacted) City/CUB Exhibit 4. Page 9 2 will increase rate base. The existence of the rider should help provide sufficient 21 funding for PGL and NS to make qualifying capital investments during the base rate 22 freeze period. This ability to make non-qualifying capital investments roughly equal to 23 the amount of depreciation expense, while recovering qualifying investment through 24 the QIP rider, will not grow the rate base element of base rates. However, these 25 mechanisms should mitigate the amount of cost efficiencies PGL and NS need to 26 achieve in order to support a longer base rate freeze period. 27 Further, under the proposed reorganization structure, the Company will 28 consolidate its service company operations, which also should produce savings. 29 Q WOULD A LONGER BASE RATE FREEZE HELP CREATE BENEFITS FOR 21 SHAREHOLDERS AND RATEPAYERS FROM THE PROPOSED 211 REORGANIZATION? 212 A Yes. The proposed Transaction will benefit PGL's ultimate investors through the 213 combination of these utilities. These benefits are outlined by Integrys's Board of 214 Directors. 215 Integrys's Board of Directors outlines its findings on the proposed Transaction. 216 It includes the following assessment: BRUBAKER,Sa1A,SSOCIATES, INC.

28 Public ( Redacted) City/CUB Exhibit 4. Page ***1 228 A longer base rate freeze will provide benefits to customers in the form of 229 increased stability and mitigated base rate increases over a five-year period. While 23 customers will pay increased costs based on the tracker mechanisms, a longer term 231 base rate freeze period will provide customers some assurance of benefits from the 232 reorganization. 233 Q DO YOU BELIEVE THAT THE COMMISSION SHOULD CONSIDER A FINANCIAL 234 INTEGRITY WAIVER PROVISION, AS PART OF THIS FIVE-YEAR BASE RATE 235 FREEZE LIMITATION FOR PGL AND NS? 236 A Yes, that is not unreasonable, since ratepayers need a utility that is able to provide its 237 essential services safely and efficiently, at least cost. However, if such a provision is 238 included, the burden of proving financial need for increasing base rates should be 239 placed on PGL and NS at the time of that filing. The Commission should be clear that 24 a waiver for financial integrity needs must meet a high standard. Any waiver should 241 be based on the necessity of an increase in rates, such as being necessary to 242 maintain an investment grade bond rating outlook. A mere expectation that PGL and 243 NS earnings may be reduced is not an acceptable reason to waive adherence to the 244 rate freeze. 245 I believe a five-year rate freeze is appropriate in this proceeding, given the 246 significant rider value to shareholders and the potential for synergy savings, which the 247 Joint Applicants (to date) have declined to quantify. "Confidential response to City Data Request 9.2. BRUBAKERtp SOCIATES, INC.

29 Public (Redacted) City/CUB Exhibit 4. Page III. Reorganization Integration and Acquisition Costs 249 Q DO PGUNS PROPOSE TO RECOVER IN RATES COSTS ASSOCIATED WITH 25 THE REORGANIZATION TRANSACTION BETWEEN WEC AND INTEGRYS? 251 A No. According to the Revised Direct Testimony of Scott Lauber (Joint Applicants Ex REV. at 11), the Joint Applicants will not seek recovery of costs incurred to 253 accomplish the reorganization. Those costs include Transaction, Change in Control, 254 Financing and Legal/Other Professional costs. 255 Q IS IT APPROPRIATE TO EXCLUDE THESE COSTS OF THE TRANSACTION OR 256 COSTS OF INTEGRATION FROM RECOVERY FROM RETAIL CUSTOMERS? 257 A Yes. While it is not clear with the detail Mr. Lauber provided on his Joint Applicants 258 Exhibit 2.1, it appears that all costs related to the Transaction will not be recovered 259 from retail customers. However, the Commission should specifically state that any 26 executive, Board of Director or senior employee severance costs or early termination 261 fees should also not be subject to recovery from retail customers. DRR City 2.2 (re 262 "severance payments"). 263 Q YOU HAVE MENTIONED POSSIBLE SYNERGY SAVINGS. DO THE JOINT 264 APPLICANTS PLAN TO EXCLUDE FROM RETAIL CUSTOMER RECOVERY THE 265 COSTS OF THE CORPORATE RESTRUCTURING THAT THE FORMAL PAPER 266 TRANSACTION IS INTENDED TO ENABLE? 267 A It appears that the Joint Applicants intend that all costs occasioned by or resulting 268 from the reorganization -- excepting only those directly connected with the formal 269 transactions to effect the changes in ownership of the involved corporate entities (the 27 Transaction) - will be subject to recovery from ratepayers. DRR City 2.2. The usual BRUBAKER,$ft SOCIATES, INC.

30 Public ( Redacted) City/CUB Exhibit 4. Page costs of such reorganizations, like restructuring corporate divisions, relocating 272 personnel or operations, and installing the same accounting and IT systems for all 273 units, are what the Joint Applicants call "transition costs" DRR City 7.1. The Joint 274 Applicants assert that "net savings" from the reorganization will flow to ratepayers 275 through the normal rate case process. (The Joint Applicants use "net savings" to 276 mean savings less the costs of producing savings. DRR City 2.2, 2.5, 6.8, 7.1.) 277 However, despite the clear, immediate benefits to Joint Applicants 278 shareholders of reorganization approval, any "net savings" to ratepayers are deferred 279 and uncertain. Any ratepayer benefit from restructuring is deferred by the Joint 28 Applicants' position that possible savings from corporate restructuring have not been 281 estimated, will not be estimated for years, and are likely to occur only after the rate 282 freeze period. Moreover, any such ratepayer effects also are uncertain, and possibly 283 adverse, since "net savings" may not exist if savings are exceeded by the costs to 284 produce savings. The only certainty appears to be planned inclusion of all "transition 285 costs" in future rate determinations. 286 IV. Financial Risk 287 Q DOES THE PROPOSED TRANSACTION FINANCING STRUCTURE CREATE RISK 288 FOR THE JOINT APPLICANTS' ABILITY TO MEET CAPITAL NEEDS FOR THEIR 289 UTILITY COMPANIES? 29 A Yes. The proposed financing structure of the Transaction will result in a significant 291 increase in the amount of debt at the parent company level, which will be supported 292 predominantly by cash distributions from utility subsidiaries. As a result, cash 293 dividend payments will be the primary source of cash flow available to WEC to 294 service the acquisition-related debt held by the parent. WEC projections show that BRUBAKER_ASSOCIATES, INC.