In June 2008, the New York Public Service Commission (PSC) established the electric energy-efficiency portfolio standards for New York’s investor-owned utilities. In its order, the PSC directed...
A proposal for utility regulatory and industry reform.
to form utility industry coalitions and joint ventures are one response to this predicament, but such approaches usually prove inadequate to resolve the industry’s most challenging problems— i.e., the need to finance and complete large capital projects.
So instead of looking to corporations to address challenges, we are looking too frequently to government. Utilities are lining up for government loan guarantees to embark on major projects. Governments are forming agencies to carry out renewable energy programs. Developers are petitioning legislatures for feed-in tariff subsidies. Technology initiatives are presented to government for funding. Ronald Reagan (“government is not the answer, it is the problem”), where are you?
In the franchised utility industry, regulation is supposed to be a surrogate for competition. Ideally, regulated outcomes ought to resemble outcomes that would flow from competition. But our nation is dotted with smallish utility service territories, many defined by political jurisdictions. This isn’t remotely the outcome one would expect from competition. I am even putting aside the municipal utilities and rural electric cooperatives and the challenges they face in meeting tomorrow’s needs.
Why is the industry Balkanized? Why is it left too segmented and too undercapitalized to advance major projects? Efforts to “roll up” the industry have progressed too slowly. This has resulted in the “mom and pop” utility flavor we have today—and left America in a position where we’re looking to governments and state authorities, rather than the nation’s utility companies, to provide programs that address our energy goals.
Why has consolidation been so slow to occur? Economies of scale are there for the taking, but regulators have been leery of utility mergers and haven’t seen mergers as particularly beneficial.
Why leery? From the state regulators’ perspective, it might boil down to a sense that there are many risks to consumers associated with mergers and all the benefits are lined up with management and shareholders. When regulators have this sense, it stands to reason they would insist that consumers see tangible near-term benefits from utility mergers. But from the utility standpoint, merger economics get destroyed if too many near-term benefits of a merger are allocated to consumers. The result is a stand-off.
It’s very important that we ask if this stand-off is really OK. Mergers and acquisitions happen much more rapidly in virtually every other industry. But consolidation doesn’t just benefit private-sector entities. Communities across the United States are talking about mergers of local governments—including vital local services like schools and fire companies. Recently, England and France announced they were merging part of their national defenses.
All this is happening in the name of saving costs. England and France, separated by a wide channel and hundreds of years of not-always peaceful history, can merge defenses for the sake of economic efficiency. Why not neighboring U.S. energy utilities? Is it possible to infer that utility regulators are erecting what amounts to a substantial uneconomic barrier to mergers?
Macro-Economies of Scale
It’s entirely possible that utility companies, along with most everyone else, are underestimating the benefits of mergers.
When people talk about merger benefits, they usually focus