By Lisa Beilfuss 

Pepco Energy Services Inc.'s $6.8 billion takeover by Exelon Corp. has been conditionally approved by the Maryland Public Service Commission, bringing the companies a step closer to merging a year after agreeing to do so.

Shares in Pepco rallied 8% on the news Friday. Exelon shares gained about 3%.

The deal has also been approved by regulators in New Jersey and Virginia, in addition to the Federal Energy Regulatory Commission, but still needs to be cleared by regulators in Washington, D.C. The companies have said they expect to close the transaction in the third quarter.

Conditions for approval in Maryland include what the commission calls higher reliability standards, $66 million in rate credits and $43.2 million for energy-efficiency programs.

In an effort to win clearance in the state, Exelon said in March that it would more than double the value of a fund to benefit customers there.

The commission said it found that the proposed merger is "consistent with the broader public interest" and "will bring specific and measurable benefits and no harm to rate payers." It also said the merger will enable Pepco in Maryland to improve reliability performance more quickly.

"We find that their day-to-day normal weather outages will be reduced, their distribution infrastructure will be improved more quickly and at lower cost, and their ability to recover from outages following major storms will be improved, all because of the merger," the commission said.

The planned acquisition would boost Exelon's base by two million accounts to 10 million in five states and Washington, as electric utilities generally are attempting to adjust to lethargic sales.

Pepco and Exelon officials said the companies were pleased with the approval but still reading it "to make sure we understand the conditions, " Exelon spokesman Paul Elsberg said.

The deal has faced local opposition in Maryland and in the District of Columbia over concerns that long-distance ownership of the utility could lead to rate increases and job losses.

Utilities and power companies have been pairing up and bulking up over the past few years to combat low power prices, tepid demand for electricity and rising costs. Regulated utilities are particularly prized for their ability to pass on costs to customers in monthly bills, provide investment returns that often are virtually guaranteed, and shield companies from having to compete in cutthroat commodity power markets.

Recent mergers include NextEra Energy Inc.'s agreement last December to buy most of Hawaiian Electric Industries Inc. for $2.6 billion; Wisconsin Energy Corp.'s move last June to buy Integrys Energy Group Inc. for about $9 billion; and the December 2013 purchase of NV Energy Inc. by Berkshire Hathaway Inc.'s energy unit for about $5.6 billion.

Exelon acquired Baltimore-based Constellation Energy in March 2012 for about $8 billion, which added two utilities--Baltimore Gas & Electric Co. and PECO--to its single Chicago-based Commonwealth Edison utility. Pepco would bring in three utilities: Pepco, Atlantic City Electric and Delmarva Power.

Cassandra Sweet contributed to this article.

Write to Lisa Beilfuss at lisa.beilfuss @wsj.com

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