For much of the past year, attorney Scott Hempling, one of regulation’s leading scholars, has been addressing the role of regulatory bodies in considering industry merger proposals. His analyses appear on his website and elsewhere in a series of thoughtful monthly essays, beginning with the proposition that regulators should develop a well considered policy on the subject well before a merger proposal hits the agency’s desk.
A subject Hempling had not addressed explicitly until now is the effect of a merger on innovation. Innovation, which dramatically transformed the telecom industry, as entertainingly described in our annals in “Technology As a Game Changer: Future Trends in Electricity – A Colloquy,” is widely expected to have a similar effect on the electricity industry. Change, perhaps profound in nature and degree, could come as electricity makes inroads in the transportation sector, as distributed generation grows in importance, and as lower cost storage enables wider
Hempling is not simply anti-merger. Indeed, he recognizes that, depending on the economic context, a merger can either facilitate or deter innovation. Post merger,
“Having increased its market share, the merged company can put more resources into experimenting while facing less competitive risk if experiments fail. And according to the economist Joseph Schumpeter, even an incumbent monopolist can be dethroned by an aspiring monopolist. That risk induces the incumbent to innovate.”
But a merger – and even the competitive context in the absence of any merger – can make innovation less likely.
“All competitors aspire to be monopolies. … Mergers reduce the number of competitors, therefore reducing the imperative to innovate.”
But, as Hempling points out,
“[T]wo seemingly opposing theories could both be correct, depending on market facts. In an already concentrated market with high entry barriers, mergers might reduce innovation; while in a highly competitive market with no entry barriers, mergers might increase innovation. Given these possibilities, utility regulators will have to weigh priorities: short-term vs. long-term, market predictability vs. market disruption.”
In other words, the issues and the context are not simple, but they’re important.
Hempling’s remarkably thorough treatise on public utility law, “Regulating Public Utility Performance: The Law of Market Structure, Pricing and Jurisdiction,“ recently published by the American Bar Association, is a must-have for any legal or regulatory bookshelf.