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Electric M&A: A Regulators Guide
In a little over a year, the electric utility industry has seen six significant mergers.1 This trend toward consolidation most likely will increase as the industry becomes more competitive. Consequently, more state commissions (PUCs) will be charged with reviewing the implications of mergers for both shareholder and ratepayer interests.
The difficulty for regulators in any merger review lies in ensuring that "pre-merger" promises truly represent "post-merger" realities. To do this, regulators should maintain a healthy dose of objectivity, and perhaps a little skepticism. Any promises made during merger proceedings should be held to the strictest accountability. As the New Hampshire PUC so aptly notes:
"[P]romises must be weighed in accordance with the underlying financial strength of the enterprise. This ensures that our evaluation is an objective analysis of the merits of the proposed acquisition. To do otherwise would be to risk illusory benefits to ratepayers based upon unsound fundamentals."2
While each merger is unique, all regulators must address one common question: Is the proposed merger in the public interest?
The Public Interest
Different states have quite different statutory obligations in determining the public interest. These standards vary from a broad determination of whether a proposed merger is consistent with the public interest to a narrow determination of whether a proposed merger would result in net harm to ratepayers (em net harm being the weaker of the two standards. Under the "net harm" standard, utilities carry the burden of proof in showing that the merger will not produce more harm than good for ratepayers. Absent from consideration is whether any meaningful and quantifiable net benefits will arise from the proposed merger. Under this standard, a merger could conceivably be approved that provides little or no net benefits to ratepayers.
The broader "public interest" standard has been described as a "landscape as open as the great outdoors." This characterization, however, can be used to unnecessarily limit the scope of regulatory review. Many regulators believe the broader public interest standard encompasses a host of quantifiable (objective) and nonquantifiable (normative) criteria. The Texas PUC, for instance, in its review of the GSU/Entergy merger, outlined a list of both sets of criteria that, to one extent or another, have been used by other
PUCs to review proposed mergers or acquisitions.
The quantifiable/objective criteria proposed by the Texas PUC include: 1) rate impacts, 2) reasonableness of the purchase price of the acquired utility, 3) potential financial condition of the merged utility, 4) investment community's view of the proposed merger, and 5) any advantages in short- or long-term financing for the surviving company as a result of the merger.3 The proposed nonquantifiable/ normative criteria include: 1) service quality, 2) reliability issues, 3) potentially streamlined administrative function, and 4) improved management control and supervision.4 The importance of each
of these criteria depends upon the
circumstances of the proposed merger and the priorities of the PUC reviewing the merger application.
Changes in rate levels and structures are often the first and best indicators of how a merger will affect ratepayers. In past mergers, some utilities have proposed rate decreases,