Effective Regulation of Public Utilities

            My third book, Regulating Mergers and Acquisitions of U.S. Electric Utilities: Industry Concentration and Corporate Complication, will be published by Edward Elgar Publishing in Fall 2020. (Click here for a Summary of Contents.) From February 2020 through March 2021, each monthly essay will excerpt a book chapter. This month’s essay excerpts Chapter 3. Prior months’ excerpts are available here. I hope this essay series, and the book, will stimulate a community-wide discussion on this crucial topic.

            The March and April essays addressed a utility merger’s birth: how buyer and seller choose each other and decide the transaction price, in a monopoly market context undisciplined by competition. Repeated dozens of times over thirty years, that birthing process concentrates franchise ownership and complicates business structure, in ways no one intended.

*   *   *

            Madison Gas & Electric serves the Madison, Wisconsin area. It is the sole utility subsidiary of a publicly-traded holding company, MGE Energy. The utility owns 92 percent of its holding company’s assets, producing nearly all of the holding company’s revenues and earnings. Seven small subsidiaries exist for only one reason: to support the local utility, which provides only local service.

            Baltimore Gas & Electric (BG&E) serves the Baltimore, Maryland area.  Its holding company parent, Exelon, owns five other utility subsidiaries, plus around 300 other companies. Those companies invest in fossil, nuclear, solar and wind generation, making wholesale and retail sales in over thirty states. BG&E represents about 8 percent of Exelon’s assets and 9 percent of its revenues.

            Before the 1980s, BG&E looked like MG&E. So did most electric utilities—each one a stand-alone company serving a single local territory, with a few minor affiliates created mostly to support its primary operations. Today, most electric utilities look like BG&E—one subsidiary among many, a minor part of a multi-state, multi-billion dollar, multi-product, multi-market holding company system.

            Over three decades, nearly 80 electricity mergers have concentrated control of the BG&Es—their monopoly franchises; their generation, transmission and distribution assets; and their sources of financing. Accompanying this concentration has been complication—complication of business activity, corporate structure and financial structure. Yet during these same three decades, legislators and regulators have worked to inject competition into historically monopolistic utility markets. This coinciding is no coincidence. Whether the competition is for wholesale generation, retail sales, transmission construction or distributed energy, incumbents’ natural reaction is to merge.