Blog 3: Why Do We See More Regulatory Commitments and Conditions?

The increase in prevalence and scope of regulatory commitments and conditions may be attributable to a number of factors including:

Factor Result
Existing pressure on costs and rates

As demand has flattened and investments continue to be needed for infrastructure, resources, and technology, rate cases have become more frequent and the pressure to reduce rates increases.

Economic maintenance and development Focus on the potential impact of a merger on local communities, low-income customers and economic development opportunities including jobs sometimes contributes to regulatory commitments.
Parent company leverage Low interest rates coupled with the balance sheet capacity of some acquirers has contributed to the use of higher levels of parent company debt to finance some transactions, and increased commitments isolating the utility from parent company debt, among other things.
”Enron Effect” The failure of Enron, crash of the financial markets, bankruptcies of a number of energy companies, and related lawsuits contribute to greater scrutiny and stricter financial conditions.
More financial and non-U.S. buyers More buyers are financial investors taking an equity position in a utility or a non-U.S. buyer who can have distinct characteristics and commitments from the traditional strategic merger of utilities.
Contested proceedings Merger approval proceedings have active intervention including consumer advocates, unions, customer groups, industrials, competitors, and environmental groups.  Increasingly, some parties view a merger application as an opportunity to seek specific benefits or to advance regulatory agendas that are not a direct product of the merger.  While this does not always lead to more commitments or conditions, it can increase the complexity of the process.
Experience As more mergers are proposed, both precedent within a state which has heard multiple mergers and industry-wide “precedent” have evolved, which has created a “layering” of commitments and conditions in some mergers.
Uncertain federal policies While not a meaningful factor in most mergers to this point, uncertainty with regard to federal energy, trade, economic and tax policies could play a role in the future.

 

Newsletter Sign Up
 
Search
 
Follow