The Corporate Governance of Public Utilities

• Published in: Yale journal on regulation 2023, Vol.40 (2), p.569-619
• Main Authors: Kovvali, Aneil, Macey, Joshua C
• Format: Article
• Language: English
• Subjects: Acquisitions & mergers; Boards of directors; Business judgment rule; Claimants; Climate action; Climate change; Coal; Companies; Corporate governance; Cost control; Cost reduction; Deference; Directors; Economic justification; Electric rates; Electricity; Fiduciary responsibility; Forest & brush fires; Governance; Incentives; Justification; Liability; Market shares; Misconduct; Nuclear reactors; Public utilities; Regulated industries; Regulation; Scandals; Stockholders; Subsidies; Value; Wage & price controls; Wildfires
• ISSN: 0741-9457; 2376-5925

Rate-regulated public utilities own and operate one-third ofU. S generators and nearly all the transmission and distribution system. These firms receive special regulatory treatment because they are protected from competition and subject to rate caps. In the past decade, they also have been at the center of highprofile corporate scandals. They have bribed regulators to secure subsidies for coal-fired generators and nuclear reactors. They have caused wildfires and coalash spills that resulted in hundreds of deaths and billions of dollars in liability. Their failure to maintain reliable electric service has contributed to catastrophic blackouts. Perhaps most consequentially, they have emerged as powerful opponents of state and federal climate action. This Article describes the unique corporate governance challenges public utilities face and argues that these governance challenges contribute to the pervasive inefficiencies and the frequency of corporate misconduct that characterize utility industries. American corporate law provides special protections to shareholders, such as the right to elect corporate boards and the requirement that directors and managers owe fiduciary duties to shareholders. The economic justification for these protections is that shareholders are the residual claimants of corporations: because they receive any value a corporation generates beyond what it owes to its fixed claimants, they have the appropriate incentives to pursue value-enhancing investments. public utilities, and that managers of public utilities should receive less deference on business decisions than they do in other industries. As we discuss, however, these reforms are difficult, and perhaps impossible, to implement effectively. That, in turn, highlights the need for strong regulatory oversight and offers additional reasons to be skeptical of the utility model.