Effective Regulation of Public Utilities

            Since the mid-1980s. a stream of mergers and acquisitions has cut the number of local, independent electric retail utilities by more than half. Nearly 80 transactions, mostly debt-financed, have converted retiree-suitable investments into subsidiaries of geographically scattered conglomerates—multi-layered, multi-state and multinational holding company systems that mix lower-risk utilities in with higher-risk ventures.

            No one—no legislator, no regulator, no utility CEO, no bond analyst, no investment banker—intended this result. No objective analyst ever recommended that the U.S. electric utility industry look like it does now. And no thinking citizen would find comfort with these five facts:

            1.  Control of a public privilege—the government-granted, monopoly utility franchise—is sold and re-sold by the private franchisee to the highest bidder, in multi-billion-dollar transactions undisciplined by normal competitive market forces.

           2.  The gain extracted from these sales goes mostly to the acquired utility's shareholders and executives, even though the economic value underlying that gain comes not from shareholder risk-taking or executive decision-making, but from customers—customers made captive by state laws that protect the utility from competition.

            3.  The purpose commonly claimed by the merging companies—“synergies”—is non-factual because they create their efficiencies estimates only after they sign their merger agreements.

            4.  The regulators responsible for deciding who should control these franchises have no plan or procedures for finding the most cost-effective provider. Instead they let their utility choose—knowing that the utility will base its choice on gain to its shareholders rather than performance for its customers.

            5.  While the merging companies seek to maximize return for their shareholders, the regulators seek mostly to avoid harm to the customers—a passion gap that produces predictably lopsided results . . .