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Opposition continues to the $6.8 billion merger of Pepco Holdings (POM) with Exelon (EXC) , throwing into question whether a settlement with District of Columbia regulators will move the transaction forward. Approval of the D.C. Public Service Commission is the remaining hurdle for the merger.

Opposition to a settlement agreement that last week appeared to be sufficient for the deal to move forward has thrown the two-year old merger on its heels, at least for the moment.

A 2-1 PSC decision last week in favor of terms to allow the transaction has been rejected by local officials, including the District's mayor. If the parties do not come to terms over the PSC-approved settlement the matter is reopened as of March 11. The D.C. government is one of the parties that must agree to the terms of a PSC approval.

The deal spread has widened on the approval uncertainty to $4.10, or 17.7%, for the all-cash, $27.25 a share transaction.

Exelon said it is having "conversations with the D.C. government and other settling parties about the commission's order and the new provisions. The discussions are ongoing, and [Exelon] will provide an update at the appropriate time."

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The merger agreement calls for a $180 million termination fee if Exelon cannot gain regulatory approval for the deal, but that fee was paid into Pepco preferred shares that Pepco can call in if the transaction fails. So in a sense Exelon has already paid out the termination fee.

D.C. Mayor Muriel Bowser said Tuesday the PSC rejected an agreement that had the support of various parties including the People's Counsel of the District of Columbia and D.C. attorney general, and that the current PSC proposal fails to protect against rate increases for District residents and assistance for low-income rate payers.

The value of the revisions required to get the deal past the mayor may not be insurmountable, a risk arbitrageur said. The alternative proposal would include $30 million in credits. The current proposals could just expire and the companies would present some revision after March 11, the arb said. But the review process could then drag on.

The key issue between the PSC and parties that are not signing on to the commission's approval of last week is the application of credits that D.C. political parties want to see go to residential customers. The current PSC plan would allow the regulator to apply such rate relief to either residential or commercial customers down the line.

This issue does not seem to be a huge gulf for the deal review.

Some arbs are likely considering the recent block of the Cleco (CNL) merger with Macquarie Infrastructure and Real Assets and opposition in Hawaii to the Hawaiian Electric Co. (HE) merger with NextEra Energy (NEE) when assessing the current regulatory risk of any utility-related transaction.