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 digest a book chapter. This month’s digests Chapter 5. Prior months’ excerpts are available here.

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            I dedicate this month’s essay to the memory of one of my dearest colleagues. Steve Dottheim was for decades the Deputy General Counsel of the Missouri Public Service Commission.  His devotion to the cause of effective regulation (“the most fun you can have with your clothes on,” he’d say) was matched only by his devotion to his two nieces, his sister, his brother-in-law, the St. Louis Cardinals and the Negro Baseball Leagues. A mentor to many, one of the most decent, hard-working, ethical and self-deprecating people I ever knew, Steve had a sharp sense of humor, most often directed at himself. He had no patience for fools or their hearing-room baloney. He was a tough, accurate judge of people. I am but one of many whom Steve made a better lawyer and a better person.  Rest in peace, Steve.

            The June essay explained how electric utility mergers waste economic resources. They also divert value. In most mergers, the acquirer pays to the target shareholders a control premium—the excess of purchase price over stock market price. Routinely, regulators let the shareholders keep the entire premium, allocating none of it to customers. This lopsidedness ignores the real source of value in utility mergers—the customers.

The value of control: Leveraging market position

            When an individual investor buys stock, she buys only a sliver of the company. Her sliver gives her no influence, so she pays only the market price. In a utility merger, the acquirer buys more than stock; it also buys control. Control allows the acquirer to increase earnings in ways ordinary investors cannot: by controlling decisions on business priorities, infrastructure spending and rate increase requests; decisions on whether to accommodate or obstruct competitors; decisions on all ways to use the acquired utility as a platform for buying new businesses or entering new markets.