Contests for Control: Who Should Make the Rules?

To acquire a utility is to win a contest.  Who runs that contest—who makes the rules and who chooses the winner—determines whether the public interest is served or disserved.

A privately-owned cafeteria in a government agency building has the exclusive right to sell meals on site, subject to the agency’s minimum requirements for food choice, price range and sanitation.  Consider two ways to change the cafeteria's ownership.  The cafeteria could run a contest, choosing the bidder who offers the incumbent the highest price.  Or the agency could run the contest, choosing the bidder who offers the customers the best food at the lowest prices.

In utility acquisitions, regulators don't run the contests; the incumbent utilities do.  Like the contest run by the cafeteria, the incumbent utility chooses the buyer who can satisfy the regulator's minimum conditions while paying the highest price for the utility's stock.  What seals the deal is the "fairness opinion":  a third party's declaration that the price is "fair"—to the acquirer and acquiree, not to consumers or the public.  The deal is then approved by the regulator if it satisfies the regulator’s minimum conditions.  But in the dozens of utility mergers since the 1980s, those minimum conditions have never included “best food at lowest prices.”

Non-Competitive Markets, Non-Competitive Results

In utility mergers, then, the incumbent is the initiator while the regulator is the reactor.  This role differential would pose no problem if the merger took place within a competitive market, because in a competitive market the competitors' strivings necessarily promote the public interest.  The acquiree would still demand the highest possible price—a premium over its current market value—but the acquirer's bid will be disciplined by competitive pressures.  The acquirer will pay a premium no greater than what it can recover through the prices it charges for service in the post-acquisition market.  If those prices are disciplined by real competition, the acquirer will pay a premium no greater than the new economic value that the coupling will create.  In a competitive market, that new economic value is necessarily a public interest benefit.  So if the market is competitive, an acquisition contest run by the acquiree can produce a public interest result.  An acquirer striving to satisfy the acquiree will simultaneously satisfy the public.

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