Applying the “Public Interest” Standard
The “public interest” standard had typically been applied as determining either the absence of harm, i.e., “no net harm,” or whether the post-merger condition would be equal to or at all better than the status quo (e.g., $1 of customer benefit could satisfy the public interest standard). In the last several years, however, more regulators have considered whether a proposed transaction, inclusive of commitments made by the buyer and the seller, will create specific benefits or new risks for customers.
Benefits considered by regulators include merger-related savings or synergies, rate credits and/or rate freezes, customer service, operational capability and reliability, financial capability and the cost of capital, commitments to employees, and community involvement. Risks that have been considered include those related to financial condition and exposure to parent or affiliate financial obligations or risks, the role of local management, affiliate interests and codes of conduct, and impacts on competitive markets.
Most buyers and sellers make specific regulatory commitments in their merger applications. A transaction’s regulatory commitments usually reflect the unique characteristics of that merger and may also seek to address areas of interest to the regulator and stakeholders. We will explore regulatory commitments further in a coming article in this series on Recent Trends in Utility Mergers.
Balancing the Interests of Stakeholders
There are many stakeholders in a merger, and most merger proceedings have multiple intervenors. In addition to the buyer and seller, acting as proponents for the merger, consumer advocates, unions, customer groups, large industrials, competitors, and environmental groups are actively involved in these proceedings. It is not uncommon for some parties to 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.
Many mergers also involve multiple state jurisdictions which may have different statutes, precedents, and policies. Satisfying the public interest as defined in different jurisdictions requires a delicate balance. Commissions generally evaluate mergers in comparison to the status quo or the most likely scenario but for the merger. Merger approvals are binary decisions for the regulator – approve the merger, with or without conditions, or reject the merger. Commissions have generally not evaluated mergers in comparison to hypothetical alternatives or different future state scenarios.
Ultimately, a balance of interests is typically struck in utility mergers. For a transaction to reach a Commission for its approval, it already reflects the balance struck by the buyer and seller regarding their respective interests. It must also reflect the interests of customers, and the other external factors cited above in the merger agreement and regulatory commitments. As noted, most mergers brought before a Commission since 2010 have been approved and closed. To the extent that regulators have expressed specific concerns about a proposed merger, they have generally imposed approval conditions that addressed those concerns. Most Commissions avoided imposing conditions which would disrupt the balance of customer, shareholder and other interests and thus cause the transaction to not move forward.
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 Utility merger agreements typically contain a “regulatory out” provision which allows the transaction to be terminated without recourse if an unacceptable regulatory order is received. In addition to a merger being rejected by the regulator, this could include a condition to an approval order which changes the economic bargain or other balance agreed to by the buyer and seller.
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