My recent book, Regulating Mergers and Acquisitions of U.S. Electric Utilities: Industry Concentration and Corporate Complication, is available from the publisher here or from major online bookstores. Here is the Summary of Contents. This website has the Preface and Chapter 1. For a 45-minute podcast on the book, hosted by Ari Peskoe of Harvard’s Environmental & Energy Law Program, click here. For a 90-minute presentation hosted by the National Regulatory Research Institute, click here (Part I) and here (Part II). This month’s essay is the seventh in a series of 13 chapter digests. The previous digests are here.
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Customers of merged companies face three risks: overcharges, acquisition debt pressure, and non-utility business failure. These risks come from a common source: the inherent conflict between the acquirer’s business goals and the utility subsidiary’s service obligations.
Holding company vs. utility subsidiary: Conflicting objectives
Unlike a utility, a holding company has no statutory obligation to customers. Its primary legal obligation is to its shareholders. True, no holding company is indifferent to its utility’s health or operational performance. But the holding company aims to maximize the value of its total portfolio, not the performance of any one subsidiary. From this fact comes conflict, over substance and over money. Consider two examples.
Conflicts over substance: A wires-only company wants low generation prices; a generation company wants high generation prices. When Exelon acquired Pepco, Delmarva Power and Atlantic City Electric, three wires-only utilities were acquired by a generation-heavy holding company. So when making financial decisions and taking policy positions, the holding company benefits by placing its generation interests ahead of its customers’ interests.
Conflicts over money: When a holding company acquires all of a utility’s stock, it becomes the utility’s sole source of equity. That fact presents a problem. While the utility has a legal obligation to put its customers first, the holding company has no legal obligation to put its utility first. The holding company will invest its funds where the return is highest, not where the customers’ needs are greatest. And most commissions have no legal authority to tell the holding company otherwise, because their jurisdiction covers the utility only.
What about independent directors? Hoping to quiet concerns about holding company-utility conflict, merger promoters put a few independent directors on the acquired utility’s board. But a utility’s independent directors are independent of the utility’s management, not of the utility’s parent. Their responsibility is to the holding company, not to the customers. . .
