Effective Regulation of Public Utilities

[This month’s essay is the abstract to my article published this month in the Energy Law Journal.  The full edition of this journal is available here.]

         Since the mid-1980s, mergers and acquisitions approved by the Federal Energy Regulatory Commission have cut the number of independent retail electric utilities by more than half. These transactions have taken every possible form: horizontal, vertical, convergence, and conglomerate; operationally integrated and remote; domestic and international; publicly traded and going-private; debt-financed and stock-for-stock.

          Accompanying this consolidation has been complication. The conventional pre-1980s utility—local, pure play, conservatively financed—is being replaced by multistate and multinational holding company systems: corporate structures housing multiple, and sometimes conflicting, business ventures—structures that owe their financeability and viability to their utility affiliates’ monthly cash flow.

         Under Section 203 of the Federal Power Act, the FERC must find these consolidating and complicating transactions “consistent with the public interest.” Despite multiple policy statements, rules, and 70-plus transaction approvals, the FERC has never defined a “public interest” in terms of the industry’s performance. Though the 1996 Merger Policy Statement states a purpose of “encouraging greater wholesale competition,” that purpose rarely appears in the FERC’s actual merger orders. These orders require only “no harm,” and no harm only to pre-merger competition—regardless of whether that pre-merger competition is effective or ineffective. Effective competition exists when a market’s structure, and its sellers’ conduct, pressure all rivals to perform at their best. By requiring only “no harm,” and by applying that standard only to pre-merger competition, the FERC has invited and approved transactions whose contributions to performance are necessarily suboptimal. For 30 years, the Commission’s merger decisions have disconnected the “public interest” from performance.

         That disconnection has produced, and continues to produce, consolidated asset ownership and complicated business structures. . . .