Baseload, Bioenergy, Geothermal, Hydropower, Solar, Storage, Wind Power

Are Utilities Getting Greener? Merger Proceedings Would Indicate Yes

Issue 6 and Volume 20.

There has been a steady stream of mergers and acquisitions (M&A) in the utility sector over the past several years. These transactions generally require public service commissions (PSC) approval in the states in which one or both of the parties have operations, and the PSCs are typically charged with approving only transactions that are in the public interest. The standards under which PSCs make determinations vary, but frequently require a finding that the transaction either provides a net benefit to customers, or at a minimum does no harm to their interests.

In order to obtain PSC approvals, parties to these transactions often agree to make commitments to increase benefits to customers and the general public, such as rate freezes and credits, commitments to provide assistance to low-income customers and commitments to preserve local jobs, among others. In light of increasing public support for green power and renewables, we reviewed the PSC orders approving ten of the largest M&A transactions involving a U.S. electric utility over the past five years to see if — and to what extent — green commitments have been included in the orders approving these transactions. We reviewed 24 orders and found that in a majority of these transactions — seven out of the ten — at least one approval order included commitments relating to renewable generation and/or energy efficiency.

One transaction with notable commitments was the 2016 acquisition of Pepco Holdings by Exelon. Among other commitments made to obtain Maryland PSC approval, Exelon committed to provide $43.2M for energy efficiency programs, $14.4M to support innovative green technologies (out of a total commitment of $50M across all jurisdictions) and $4M for sustainable energy workforce development programs, in addition to committing to construct 20 MW of renewable generation capacity.

Even in transactions where the parties did not make specific commitments, approval orders sometimes noted the parties’ green reputations. In the order approving the acquisition of Central Hudson Gas & Electric by Fortis, the New York PSC noted Central Hudson’s “environmentally positive” reputation.

As public support for renewable generation continues to increase, we expect these types of commitments to become even more widespread and more significant and something that parties to these transactions will need to factor into their cost profiles and valuation models.

Jessica Monastra is an associate in Bracewell’s New York office.

Jessica Monastra is an associate in Bracewell’s New York office.