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Why mergers’ real hurdle is state public utility commissions

Brent Nyitray, CFA, MBA

Is the Integrys–Wisconsin Energy merger a "do" for investors? (Part 8 of 10)

(Continued from Part 7)

State public utility commission approvals are required in Illinois, Wisconsin, Michigan, and Minnesota

Here lies the difficulty in getting these deals approved. State public utility commissions are advocates for ratepayers—in other words, customers. These commissions generally have a pretty adversarial relationship with the companies that are merging. Let’s see why this matters to investors.

Utility companies are different

Utilities are typically called “natural monopolies.” There really is only need for one electricity and natural gas provider in a geographic area. It makes sense for one company to control the whole business in order to take advantages of scale. To prevent the utility from price gouging, the state public utility commissions approve rates through rate cases. In other words, the companies petition the regulators to increase rates.

In these transactions, the public utility commissions will generally demand rate concessions from the companies, and they usually want to capture most of the synergies of the deal. The idea is to make the merger just barely profitable for the companies. The commissions can and do demand all sorts of additional capital expenditures—especially on renewable energy.

The state approval process

Generally, companies will make their initial filings with the state public utility commissions and request permission to merge. They’ll lay out the business plan and the economic rationale. They’ll usually lob in their first offer of rate concessions.

Next, the state public utility commissions will begin their investigation of the merger. They’ll seek public comment on the deal, typically during 90-day periods, when a plethora of professional activists (pro–green energy, anti-development, anti-energy) get together and file their comments and complaints. The amount of sheer paperwork that goes into a utility merger is huge.

Finally, the staff economists will study the deal and conclude the company can’t possibly merge without harming consumers. Then the real negotiation begins between the companies and the regulators. Once the companies “have a deal” with the regulators, the state public utility commission will meet and listen to the staff give every reason why the deal shouldn’t be allowed.

And then the deal—usually, but not always—gets approval. If you ever go to a state public utility commission hearing, you’ll see the staff lawyers, a bunch of Wall Street guys chatting on their laptops with Bloomberg on, some local reporters, and a bunch of bored civil servants.

Other important mergers

Other important merger spreads you should consider include the Covidien (COV) and Medtronic (MDT) deal as well as the DIRECTV (DTV) and AT&T (T) deal.

Continue to Part 9

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