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. Last month's excerpt, of the Preface, is available here. This month is Chapter 1. I hope this essay series, and the book, will stimulate a community-wide discussion on this crucial topic.

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          A utility gets its earnings from a unique market position—a monopoly position, embodied in an exclusive franchise granted and protected by state law. Selling control of that monopoly position brings gain to the seller, new earnings to the buyer. The parties sell and buy a public franchise for private gain. Customer benefits, if any, are incidental.

Merger purpose: Monetize the government-granted franchise

          In a truly competitive market, a successful company gets its market position by merit. Its assets, executive leadership and employee knowledge, financed with dollars risked by investors, combine to provide a service that its customers prefer over its competitors'. And this market position comes with no guarantees. To maintain it, the company must keep beating its competitors. 

         Contrast your utility. It got its market position not by merit but by government favor. As long as it performs prudently, it keeps that market position—a monopoly position that comes with the right, protected by statutory and constitutional law, to receive a fair return on its prudent, used-and-useful investments. That monopoly market position has high value. In a utility merger, the buyer and seller each aim to unlock that value.

         The target's goal: Sell franchise control to get gain. When a company seeks acquirers, state corporation law imposes a fiduciary duty: get the highest price. The utility’s board becomes an auctioneer, pushing bidders to raise their bids until all but one drop out. Utilities’ proxy statements—SEC-required filings explaining these transactions to voting shareholders—regularly document how their boards picked the company offering the highest price.¹