Regulating Mergers and Acquisitions of U.S. Electric Utilities: Industry Concentration and Corporate Complication

571 Pages·2020·6.821 MB·English

by  Scott Hempling

Regulating Mergers and Acquisitions of U.S.
Electric Utilities: Industry Concentration and
Corporate Complication
To George Spiegel, Harry Trebing and David Penn:
Teachers, mentors, leaders
Regulating Mergers
and Acquisitions of
U.S. Electric Utilities:
Industry Concentration
and Corporate
Complication
Scott Hempling
Cheltenham, UK • Northampton, MA, USA
© Scott Hempling 2020
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic, mechanical or
photocopying, recording, or otherwise without the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2020944306
This book is available electronically in the
Law subject collection
http://dx.doi.org/10.4337/9781839109461
ISBN 978 1 83910 945 4 (cased)
ISBN 978 1 83910 946 1 (eBook)
Contents
About the author xxii
Preface xxiii
Author’s note: Why write a book on electricity mergers? xxix
Acknowledgements xxxv
List of figures xxxvii
List of tables xxxviii
List of acronyms xxxix
Table of legal authorities xli
PART I THE TRANSACTIONS: SALES OF PUBLIC
FRANCHISES FOR PRIVATE GAIN,
UNDISCIPLINED BY COMPETITION—
PRODUCING A CONCENTRATED,
COMPLICATED INDUSTRY NO ONE INTENDED
1 Diverse strategies, common purpose: selling public
franchises for private gain 2
2 Missing from utility merger markets: competitive discipline 28
3 The structural result: concentration and complication no
one intended 34
PART II THE HARMS: ECONOMIC WASTE,
MISALLOCATION OF GAIN, COMPETITIVE
DISTORTION, CUSTOMER RISKS AND COSTS
4 Suboptimal couplings cause economic waste 61
5 Merging parties divert franchise value from the customers
who created it 103
6 Mergers can distort competition: market power,
anticompetitive conduct and unearned advantage 133
7 Hierarchical conflict harms customers 252
v
vi Regulating mergers and acquisitions of U.S. electric utilities
PART III REGULATORY LAPSES: VISIONLESSNESS,
REACTIVITY, DEFERENCE
8 Regulators’ unreadiness: checklists instead of visions 314
9 Promoters’ strategy: frame mergers as simple, positive, inevitable 325
10 How do regulators respond? By ceding leadership,
underestimating negatives and accepting minor positives 345
11 Explanations: passion gaps and mental shortcuts 369
PART IV SOLUTIONS: REGULATORY POSTURE,
PRACTICES AND INFRASTRUCTURE
12 Regulatory posture and practice: less instinct, more
analysis; less reactivity, more preparation 402
13 Regulatory infrastructure: strengthen regulatory resources,
clarify statutory powers, assess prior mergers’ effects 426
The U.S. electric industry: a tutorial 436
Appendix A.1 List of companies referenced 467
Appendix A.2 Does federal bankruptcy law preempt a state
commission’s franchising authority? 472
Appendix A.3 Ring-fencing provisions approved by the D.C.
Public Service Commission 474
References 482
Index 491
Extended contents
About the author xxii
Preface xxiii
Author’s note: Why write a book on electricity mergers? xxix
Acknowledgements xxxv
List of figures xxxvii
List of tables xxxviii
List of acronyms xxxix
Table of legal authorities xli
PART I THE TRANSACTIONS: SALES OF PUBLIC
FRANCHISES FOR PRIVATE GAIN,
UNDISCIPLINED BY COMPETITION—
PRODUCING A CONCENTRATED,
COMPLICATED INDUSTRY NO ONE INTENDED
1 Diverse strategies, common purpose: selling public franchises
for private gain 2
1.1 The Transaction’s Essence: Transferring Control of
a Government-protected Franchise 2
1.2 The Transaction’s Purpose: Monetize the
Government-granted Franchise 5
1.2.1 Target’s Goal: Sell Franchise Control for Gain 5
1.2.2 Acquirer’s Goal: Buy Franchise Control to
Increase Earnings 9
1.2.2.1 Increase the value of generation assets 10
1.2.2.2 Buy a new market position 11
1.2.2.3 Increase the acquired utility’s rate base 15
1.2.2.4 Gain advantages in competitive markets 16
1.2.2.5 Balance business portfolios,
diversify regulatory risk 17
1.3 Supporting Stimuli 20
vii
viii Regulating mergers and acquisitions of U.S. electric utilities
1.3.1 “Everyone’s Doing It” 20
1.3.2 Low Interest Rates 22
1.4 Missing from the Transaction’s Purpose: Customer Benefits 23
1.4.1 Acquirers Compete on Price, Not on Performance 23
1.4.2 Customer Benefits Serve Regulatory Strategy,
Not Transactional Purpose 25
2 Missing from utility merger markets: competitive discipline 28
2.1 Merger Discipline Under Competitive Market Conditions 28
2.2 The Absence of Competitive Discipline in Utility
Monopoly Mergers 30
2.2.1 The Absence of Competitive Conditions 30
2.2.2 The Absence of Arm’s-length Bargaining 31
2.3 The Absence of Competitive Discipline Leads to
Insufficient Customer Benefits 32
3 The structural result: concentration and complication no one intended 34
3.1 Concentration: Chronological and Geographical 37
3.1.1 Concentration Defined 37
3.1.2 Chronological View: Three Decades of Mergers 37
3.1.3 Geographical View: Intra-regional,
Inter-regional, International 40
3.1.4 Acceleration: Mergers of the Previously Merged 43
3.2 Complication: Business Activities, Corporate Structure,
Financial Structure 47
3.2.1 Complication Defined 47
3.2.2 Business Activities 47
3.2.2.1 Geographic complication 48
3.2.2.2 Type-of-business complication 49
3.2.3 Corporate Structure 51
3.2.3.1 The utility’s relationship to its shareholders 51
3.2.3.2 The types of ultimate shareholders 52
3.2.3.3 The types of inter-affiliate relationships 53
3.2.3.3.1 Sales of services: three types 54
3.2.3.3.2 Financial transactions: four types 54
3.2.4 Financial Structure 55
Extended contents ix
PART II THE HARMS: ECONOMIC WASTE,
MISALLOCATION OF GAIN, COMPETITIVE
DISTORTION, CUSTOMER RISKS AND COSTS
4 Suboptimal couplings cause economic waste 61
4.1 By Choosing Acquirers Based on Price, Target Utilities
Leave Performance Gains Behind 61
4.1.1 Opportunity Cost 61
4.1.2 Economic Rent vs. Dynamic Efficiency 62
4.1.3 Portfolio Risk 63
4.1.4 Selection Based on Price: a Violation of Legal Duty 64
4.2 “No Harm”: the Wrong Benefit-Cost Ratio 65
4.2.1 The Investors’ Standard: Highest Possible Return 65
4.2.2 The Commissions’ Standard: No Harm, with
Variations 66
4.2.2.1 No harm 66
4.2.2.2 No harm plus a defined benefit 68
4.2.2.3 No harm plus an undefined benefit 68
4.2.2.4 Harm is permissible if outweighed
by benefit 69
4.2.3 Regulatory Error: Merger Competition
Discouraged, Regulatory Principles Violated 70
4.2.4 Judicial Error: Misunderstanding “Public Interest” 72
4.3 Commissions Treat Merger Costs Inconsistently 74
4.3.1 Transaction Costs 74
4.3.2 Transition Costs 75
4.3.3 Acquisition Cost 76
4.3.3.1 Acquisition price vs. acquisition cost 76
4.3.3.2 Treatment of acquisition cost in
merger approval decisions 76
4.3.3.3 Distinct issue: rate treatment of the
acquisition premium 77
4.3.3.3.1 Consistent principle: exclude
the premium from rates 77
4.3.3.3.2 Variations in rate treatment 78
4.3.3.3.3 Does disallowing the premium
from rates protect customers
sufficiently? 80