Suboptimal Couplings Cause Economic Waste

            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. Prior months’ excerpts are available here.

            The March, April and May essays explained the transactions: sales of public franchises for private gain, undisciplined by effective competition, producing a concentrated, complicated industry no one intended.  Repeated 80 times over 30 years, electricity mergers have wasted economic resources, diverted value from customers to shareholders, weakened competitive forces and intensified intra-corporate conflict. Let’s start with economic waste.

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            In both competitive and monopoly markets, acquisition targets choose their acquirers based on highest price. In competitive markets, that highest price will come from the most cost-effective performer. Its ability to compete successfully against others creates the expected revenue-to-cost margin that supports its acquisition price. Competitive markets align the interests of acquirer, target and customers.

            Monopoly markets don’t. Because a monopoly market lacks a competitive market’s discipline, the highest-price acquirer won’t necessarily be the best performer. If target utilities prioritized performance, competing acquirers would lower their offer prices and their costs, enabling post-merger service at lower rates. The economy gains. But target utilities choose their acquirers based on price instead of performance, so the economy loses. As do customers, because their utility has denied them what they pay for: service at a quality and cost that replicates competitive market outcomes.

            But won’t the highest offer price necessarily come from the most cost-effective performer? Not in a utility monopoly market, because the final product price is set not by competition but by regulators. The acquirer will base its high-price offer not on its expectation of beating its competitors but on its expectation of persuading regulators—persuading them to set rates above appropriate levels.

 

“No harm”: The wrong benefit-cost ratio

            Merger investors seek biggest bang for buck. Most regulators require only “no harm.” This simple difference explains why merger gains go disproportionately to investors. No-harm conflicts with regulation’s central purpose: to produce outcomes comparable to competition. In regulation, “no harm” means zero gain. In competition, zero gain would get any executive fired.

Services

Testimony, Papers, and Presentations

Surrebuttal Testimony of Scott Hempling on Behalf of Baltimore Washington Construction and Public Employees Laborers' District Council in the matter of an Application of Potomac Electric Power Company for Authority to Implement a Formal Multiyear Rate Plan for Electric Distribution Service in the District of Columbia
Hempling testimony to D.C. PSC (Feb. 2020)
Direct testimony before the Public Service Commission of Wisconsin in the Joint Application of Wisconsin Electric Power Company and Wisconsin Gas LLC, for Authority to Adjust Electric, Natural Gas, and Steam Rates
A layperson’s introduction to regulation created by Scott Hempling in support of The British Columbia Utilities Commission's inquiry into whether utility regulation should extend to utilities owned by indigenous nations.
This tesimony relates to the modification of rates, charges, and tariffs for retail electric service in Oklahoma.

Books by Hempling

Regulating Public Utility Performance

“[A] comprehensive regulatory treatise …. In all respects, it merits comparison with Kahn and Phillips."

Regulating Public Utility Performance:  The Law of Market Structure, Pricing and Jurisdiction

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Preside or Lead

Preside or Lead?
The Attributes and Actions of Effective Regulators

Now Available on Kindle

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Hempling Appearances

Energy Bar Association
Panel on Practice Principles for New Regulatory Lawyers


UDC Law School Panel
Is the Exelon Takeover of Pepco in the Public Interest?


Nigeria Electricity Regulatory Commission
3rd Judges’ Seminar


Telecom Forum
Asamblea Plenaria REGULATEL


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