Mergers: Who Has a Vision?

These comments were submitted by Fred Grygiel*, Former Chief Economist NJ Board of Public Utilities.

The Hempling essay, “Utility Mergers: Who Has a Vision?”  is, as always, interesting and informing. Here are some observations based on my experiences with some very large merger cases in NJ such as Exelon/PSEG; First Energy/GPU; Pepco/Atlantic Electric; and AGL Resources/Etown Corp.

Please note this is a “staff” perspective about who has a vision . . . OK, here we go, the petition is filed:

  1. The theme is always “bigger is better, please let us tell you why!”
  2. The Acquiring companies usually say there will be synergies and savings and there is room for “sharing” some of these benefits with the customers of the Acquired company but implicitly “don’t get too greedy” or we might just pull the plug making you guys the regulatory impediment to a deal that the “Street” seems to like (and in some cases really like).
  3. The local unions usually provide useful insights on the potential negative impacts on the quality of service, if the merger was approved without additional protections to maintain control and the size of the workforce. Talk to them as extensively as you can. Check the records for both companies. Yes, they are protecting their careers, so what’s wrong with that?
  4. The Acquiring company is quick to engage the governor’s office and top legislators through local lobbyists/law firms. No guarantees here but they know every set of helping hands will be worth it.
  5. The companies usually spend months in preparation for the case with the expectation of and announced need for "expedited review” by their regulators anxious to do this positive deal!
  6. Generally the rating agencies/analysts seemed to always favor the combination warning regulators not to try and grab too big a piece of the synergies lest they “kill the deal.” Not too much debt though!
  7. Few State regulators stay around long enough to develop merger “expertise.” The Acquiring companies not surprisingly are way ahead out of the gate. And since mergers are not an annual event, it is tough for the staff and commissioners to always keep merger-sharp. There are tons of other cases percolating.
  8. The Acquiring companies stress that “local control” will remain and decisions by the new Parent would never reduce the quality of service. Be prepared to test that claim when the power goes out for a few weeks after a few storms.
  9. After a while, the promises of “Ring fencing” look like a second best option to protect ratepayers, given that complex corporate structures are not that easy to monitor, especially across state borders. Acquiring companies loath changing “their” rules of the game. Take the money and run and let someone else tinker with the structures.
  10. Can’t remember considering any post-approval measures of performance that would secure a greater share of savings or deny recovery of any increased costs of providing services. The regulator gets one shot, so get it right. Or be prepared to say we missed it.

Generally, I think that commissions need much more resources dedicated to evaluating the potential benefits of scale versus the exposure of their utility to “foreign” control, since commissions are held accountable locally for the performance of their state regulated utilities. Clearly the Acquired company will have less corporate clout once the deal is done and that is a reality. What if a merger doesn’t work out? Has anyone heard of a forced divestiture of the Parent? I have not seen the latest compilation of approved v. denied merger requests in electric/gas. But my guess would be that the approval rate is very high.

So what to do?

  • Build and protect the “independence” of the commission from political intruders to the process. Don’t wait till the case is filed, obviously.
  • Establish a “merger” team in the commission/staff with the obligation to network with any filed merger cases in other jurisdictions, especially staying familiar with “expert” testimony.
  • Spend commission resources on sending staff to industry merger meetings, university seminars, and any federal workshops before the cases are filed. Get out and interact with the merger mavens before they show up on your doorstep.
  • Be prepared to manage tons of data; request all the explanations you need to do your job. Don’t worry when they say “what the hell are you going to do with all this stuff?” 
  • DO NOT WAIT UNTIL THE CASE GOES TO HEARINGS BEFORE TALKING TO YOUR COMMISSIONERS! No, I am not yelling just being emphatic. Talk-talk-talk to the decisionmakers early and often (local laws permitting).
  • In-house counsel should be fully familiar with recent and pending merger cases, since they will bear the brunt of identifying which arguments find support. Usually overmatched, so go slower and reach out for help.
  • Finally, remember that building the case for various merger policies begins and solidifies at the staff level. Trying to build commissioner support with less than all the facts and analysis could destroy your credibility before the case begins. Protecting the public’s interest doesn’t have a fixed term of office—it is a career commitment. So, live up to it, since you will be around when anything hits the fan years down the road.

 

* Disclaimer:  The views and opinions expressed are those of the author alone, and do not necessarily reflect those of the current commissioners of the NJBPU or its professional staff.
 

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