SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27764; 70-10135)

Pepco Holdings, Inc.

Order Authorizing Acquisition of Interest in Nonutility Business

November 19, 2003

Pepco Holdings, Inc. ("Pepco"), a registered holding company, Washington D.C., has filed an application ("Application") with the Securities and Exchange Commission ("Commission") under sections 9(a)(1), 10, and 12(f) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 54 under the Act. The Commission issued a notice of the Application on July 21, 2003 (Holding Co. Act Release No. 27699).

Pepco directly or indirectly owns all of the outstanding common stock of the following public-utility companies: Atlantic City Electric Company; Delmarva Power & Light Company; Potomac Electric Power Company; Conectiv Delmarva Generation, Inc.; and Conectiv Atlantic Generation, LLC (collectively, the "Utility Subsidiaries"). Together, the Utility Subsidiaries provide retail and wholesale electric service to more than 1.8 million customers in parts of the District of Columbia, Delaware, Maryland, New Jersey, and Virginia. The Utility Subsidiaries and other non-regulated generating subsidiaries of Pepco own all or portions of twenty-four electric generating plants in the United States having a combined generating capability of approximately 4,580 megawatts. Through direct and indirect subsidiaries, Pepco is also engaged in various nonutility businesses.

Pepco requests authority to acquire, directly or indirectly through one or more subsidiaries, a membership interest in PowerTree Carbon Company, LLC ("PowerTree Carbon"). The initial capital contribution of Pepco will be $50,000. Pepco also requests authority to sell all or a portion of its membership interest in PowerTree Carbon at any time to any of its associate companies. Any intra-system sale shall be for an amount equal to Pepco's investment (or, in the case of a sale of a portion of the membership interest, the pro rata share of the investment). No sale to an associate company that requires approval by any other regulatory commission shall take place until such approval has been obtained.

PowerTree Carbon, a Delaware limited liability company, was organized in cooperation with the U.S. Department of Energy ("DOE"). It is designed to facilitate investments by energy companies such as Pepco in forestation projects in the Lower Mississippi River Valley and possibly other sites.

One proven means for reducing greenhouse gases is to use trees to remove CO2 from the atmosphere and store it in tree biomass and roots and soil. PowerTree Carbon is part of an industry-wide effort to voluntarily address climate change through measures designed to reduce greenhouse gas emissions in response to President Bush's recent "Climate VISION" plan, or Climate, Voluntary Innovative Sector Initiatives: Opportunities Now. Climate VISION is the first step in the President's policy of encouraging industry to produce voluntary cuts in greenhouse gas emissions. Pepco states that the Bush Administration is considering, as part of its Global Climate Change program, the creation of transferable emission reduction credits for measures that reduce greenhouse gas emissions.

PowerTree Carbon has obtained capital contribution commitments totaling approximately $3.275 million from holding companies, electric utility companies and other energy concerns. The capital contributions by registered holding companies (or their subsidiaries) and their corresponding percentage interests in the company are as follows:

In the aggregate, the capital contribution commitments of the eleven registered holding companies represent approximately 36.6% of the total commitments by the initial members.¹

Capital contributions to PowerTree Carbon will be used to fund six forestation projects located in Louisiana, Mississippi and Arkansas. These reforestation projects will provide multiple environmental benefits, including removing from the atmosphere and storing over 2 million tons of CO2 over the projects' 100-year lifetimes. Other benefits will include: restoring habitat for birds and animals; reducing fertilizer inputs to waters; and stabilizing soils. Two of the projects will involve purchase and donation of land to the U.S. Fish & Wildlife Service, while other projects will involve obtaining easements for tree planting on private land. The contributions of the members to PowerTree Carbon will be utilized for land acquisition and to pay the cost of planting tree seedlings. It is estimated that these projects will provide carbon benefits of more than 400 and 450 tons of CO2 per acre by years 70 and 100, respectively, at a cost of less than two dollars per ton.

PowerTree Carbon was organized as a for-profit limited liability company ("LLC"), to allow carbon or CO2 reduction credits, if and when they become available, to be more readily transferred. The LLC structure will also allow members to take advantage of tax benefits of land donation. Although formed as a for-profit LLC, PowerTree Carbon is essentially a passive medium for making investments in projects that are not expected to have any operating revenues, and will not engage in any active business operations.

Under the Operating Agreement of PowerTree Carbon ("Operating Agreement"), the business and affairs of the company shall be managed by its board of managers ("Board"). Each member that commits to make a capital contribution of at least $100,000 is entitled to appoint one representative to the Board. In general, actions by the Board may be taken by a majority of the managers present at a meeting. However, certain actions of the Board or of any individual manager or any officer require authorization by a two-thirds vote of the full board. These include, among other actions: the sale, exchange or other disposition of any of the assets of the company greater than $20,000 in value; the commencement of a voluntary bankruptcy proceeding; the declaration or making of any distributions to members; the incurrence of any indebtedness by the company; capital expenditures exceeding $20,000; and the acquisition or lease of any real property and any sale of, donation, lease or sublease affecting real property owned by the company.

New members will be admitted to PowerTree Carbon only upon the unanimous approval of the then existing members. Upon admission of any new member, the percentage interests of existing members shall be reduced accordingly. A member may transfer all or a portion of its membership interest only upon receiving approval of two-thirds of the existing members, except that, without the prior approval of the other members, a member may transfer all or a part of its membership interest to an affiliate of such member or to any other member. A two-thirds vote of the members also will be required to elect officers of PowerTree Carbon. The members have equal voting rights, regardless of their percentage interests in PowerTree Carbon.

The Operating Agreement provides that, so long as any member is a registered holding company or subsidiary company thereof, any voting rights received or otherwise obtained by that member equal to or exceeding ten percent of the total outstanding voting rights in PowerTree Carbon shall be automatically (and without any requirement for consent on the part of the affected member) allocated to the other members in equal portions such that no registered holding company member will hold ten percent or more of voting rights in PowerTree Carbon. In addition, any member may elect to limit its voting rights to less than five percent of the total voting rights in PowerTree Carbon, in which case the voting rights of such member or members equal to or exceeding five percent of the total voting rights in PowerTree Carbon will be automatically allocated in equal portions to the other members.

The Operating Agreement further provides that each member (or its designee(s) or transferee(s)) shall be entitled to claim a pro rata share of all carbon that is determined to be sequestered by PowerTree Carbon's efforts to which legal rights, if any, have been obtained ("Carbon Reductions") based on the member's percentage interest in PowerTree Carbon. A member may generally utilize its share of any Carbon Reductions in connection with its participation in any greenhouse gas reporting or regulatory program or transfer or assign such Carbon Reductions to one or more other persons.

Pepco states that it cannot comply with all of the requirements of rule 53(a), but that none of the adverse conditions described in rule 53(b) exist. During the twelve month period that ended September 30, 2003, Pepco's "aggregate investment," as that term is defined in rule 53(a)(1), in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs"), as those terms are respectively defined in sections 32 and 33 of the Act, was approximately $3.0 billion. Given that Pepco's "consolidated retained earnings," as that term is defined in rule 53(a)(1), during that period, were approximately $886 million, the company cannot qualify for the safe harbor of rule 53(a)(1). Pepco, however, is still below its aggregate investment limit.²

Pepco states that, since the Commission issued the Financing Order, (1) these types of investments have not had a material adverse impact on its capitalization; and (2) its consolidated capitalization has improved.³

No state commission and no federal commission, other than this Commission, has jurisdiction over the proposed acquisition of a membership interest in PowerTree Carbon. Pepco estimates that the fees and expenses incurred or to be incurred in connection with its proposal will not exceed $2,000.

Due notice of the Application has been given in the manner prescribed by rule 23, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, it is found that the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Application is granted immediately, subject to the terms and conditions prescribed in rule 24 under the Act.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

Endnotes:

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¹ The other energy companies that have committed to make capital contributions are: Arizona Public Service Company, a subsidiary of Pinnacle West Capital Corporation; The Detroit Edison Company; Diversified Lands LLC, a subsidiary of CLECO Corporation; Duke Energy Corporation; Oglethorpe Power Corporation; Oklahoma Gas & Electric Company, a subsidiary of OGE Energy Corp.; Peabody PowerTree Investments, LLC, a subsidiary of Peabody Energy Corporation; Public Service Electric and Gas Company; PNM Resources, Inc., the parent company of Public Service Company of New Mexico; Reliant Resources, Inc.; Tennessee Valley Authority; TXU Generation Company LP, a subsidiary of TXU Corp.; We Energies (the trade name of Wisconsin Electric Power Company and Wisconsin Gas Company); and Wisconsin Public Service Corporation.

² By order dated July 31, 2002 (Holding Co. Act Release No. 27557, "Financing Order"), the Commission authorized Pepco to invest up to 100% of its consolidated retained earnings, plus $3.5 billion, in EWGs and FUCOs.

³ Pepco states that, as of September 30, 2003, its consolidated capitalization consisted of: 32.0% equity. As of June 30, 2001, the most recent period for which financial information was evaluated in the Financing Order, the company's consolidated capitalization consisted of 31.4% equity.