PERSPECTIVE
WORLD-GENERATION NOV/DEC 2015
16
Surprisingly America’s electric utilities
are not the world’s largest in terms of reve-
nues and other measures. Of the 53 inves-
tor-owned and publicly traded electric and
combination electric and natural gas utilities
in the US only 16 have revenues in excess of
$10 billion with the largest revenue of $29
billion for Exelon, followed by Duke at $24
billion and Southern at $18 billion. Compare
those revenues to the European giants E.On
SE at $173 billion, Electricite de France $95
billion, RWE $66 billion, Ibedrola at $44 bil-
lion and National Grid at $22 billion. Thus
recently the US electric industry has been
consolidating with the number of electric
utilities coming down from over a hundred
just two decades ago to 53 today.
However, merging US electric utilities
has become increasingly more difficult as
the process requires “two steps”; the negoti-
ation between the merging utilities followed
by formal proceedings before state public
service commissions (PSC) and the Federal
Energy Regulatory Commission (FERC). As
the US electric utilities ownership expands
across more states the number of regulatory
agencies involved increases, leading to high-
er levels of regulatory risk for approval of
the merger. Nonetheless, successful merg-
ers have been accomplished and a key fac-
tor has been a well-planned approach to the
regulatory approval hurdle.
In the US both PSC and FERC approv-
als for a merger involve meeting a “public
interest” standard established by law. This
additional regulatory requirement for public
utility mergers is not found in the general
business environment.
Utility mergers, like general business
mergers, begin with the determination of an
acquisition price premium over the recent
market price of the stock of the seller. A
premium is justified in that, in the future,
the merged company would produce syner-
gies for which the present value is in excess
of the premium paid. This is the same ratio-
nale for non-regulated as for regulated com-
panies. There is a risk in any merger or
acquisition of overpaying. This is a likely
result if the expected merger synergies are
not realized, for example.
While many states have a “public inter-
est” standard for merger approval, most reg-
ulators, and many intervening parties,
expect the merger application to contain
quantifiable “benefits” to rate payers (utility
industry jargon for monopolized “custom-
ers”.) The most direct and compelling “ben-
efit” is an immediate rate decrease transfer-
ring some of the remaining future synergy
to customers immediately after the merger.
Regulators, including this former regu-
lator, have approved mergers based on the
finding of other “benefits” as well. These are
usually based on some set of unique circum-
stances at the to-be acquired utility. These
have included: improved service quality,
lower cost future investment in needed
assets, lower financing costs, improved cus-
tomer service, faster introduction of new
technologies (smart grid or renewable ener-
gy as examples) and other financial and
operational benefits unavailable or more
expensive to the acquired utility without the
merger. The risk here is that the regulator
can demand too much of the future synergy
benefit leaving scant or only the most specu-
lative synergies to the acquiring company
shareholder.
A corollary to the “benefit” require-
ment is the regulators’ additional demand
for what I call “concessions.” This category
includes such things as future expenditures
on regulator’s selected programs, such as
weatherization or energy efficiency or char-
ity payments, none of which would be
recoverable in the revenue requirement i.e.
customer rates. Another type of “conces-
sion” would be acceptance of post-merger
restrictions such as prohibitions on moving
corporate headquarters or release of
employees of the acquired company. These
all having the effect of lowering the synergy
value and it is here that a regulatory strate-
gy must strike a balance between enough
concession to win merger approval but not
so much as to reduce future synergies
below acceptable levels.
There is also the additional risk that a
long regulatory process may prove to be
too administratively expensive or that the
favorable factors, initially driving the merg-
er, may have diminished during the years
of regulatory proceedings. Examples of this
“regulatory lag” risk causing merger fail-
ures are also found in proceedings over the
past decade including in proceedings
before the FERC where the author served
as commissioner.
Recent history in the US is replete with
examples of successful and unsuccessful
electric utility mergers. A number are in
regulatory proceedings at this time and
more will come. The lesson is that regulated
electric utilities embarking on “doing the
two step” merger require not only a compe-
tent “corporate acquisition strategy” but also
a carefully planned and executed “regulato-
ry strategy” as well.
ABOUTTHE AUTHOR
Branko Terzic is a Managing Director
at Berkeley Research Group LLC and a
Nonresident Senior Fellow of the Atlantic
Council’s Global Energy Center in
Washington, DC.
Terzic has served as Commissioner on
the U.S. Federal Energy Regulatory
Commission and Commissioner of the State
of Wisconsin Public Service Commission.
AMERICAN MERGERS: DOINGTHETWO-STEP!
BY BRANKOTERZIC
