Removing Disincentives: State Regulatory Treatment of Merger Savings
15 October 2006
By Dr. Kenneth Gordon, et al.
Success in achieving merger-enabled savings has the potential to be a win-win situation for utility shareholders and customers alike. However, regulators often seek a large percentage of the merger benefits for customers, leaving little incentive for utilities to pursue these economies. State regulatory policies that pass through to customers all of the benefits of efficiency-enhancing utility mergers -- while at the same time ignoring the recovery of merger costs -- are a substantial barrier to further rationalization of the US utility industries.
This article from The Electricity Journal discusses the importance of removing artificial disincentives to the pursuit of mergers. The authors argue that given the potentially significant efficiency benefits that mergers can provide, ensuring that the combined utility's shareholders receive a share in the benefits of the merger is an essential regulatory tool. Mergers and acquisitions can provide an effective way to reduce costs borne by consumers, and increase the value that they receive, by achieving economies of scale, scope, and learning.
