The challenges of the regulatory review of diversification mergers

Electric and natural gas utility merger activity has increased over the past several years. These proposed mergers, however, differ from those experienced in past decades since they are motivated by diversifying utility operations to address a number of risks associated with changing energy markets and policy. While the benefits of these recently-proposed utility combinations appear to be relatively convincing to shareholders, the value proposition for regulators and ratepayers is not quite so evident. The regulatory review of these proposed diversification mergers can be difficult since, by their very nature, they are designed to minimize risk, not generate synergies or efficiencies. This raises a number of hard questions and tough choices for regulators. In fact, many of the larger policy challenges in the regulatory evaluation of several of these recent merger proposals surrounds the degree to which ratepayer benefits are created, and the degree to which ratepayer risks are reduced. This research addresses three major issues in recent utility merger proceedings that include: (1) assessing merger standards of review; (2) understanding ratepayer benefits; and (3) managing potential financial risks.