Are Merger Savings a Factor In Determining Whether It Benefits the Public ?
Usually, utility mergers can be justified as conferring a public benefit because under the traditional cost-based rate base/rate of return method, any financial savings gained due to economies related to the merger would ultimately be passed through to consumers through ratemaking in the form of lower annual revenue requirements and lower rates for ratepayers.
In City of York v. Pennsylvania Public Utility Commission, 449 Pa. 136, 141, 295 A.2d 825, 828 (1972), our Supreme Court approved the merger because the merger would lower those costs, explaining:
Not only did the Commission correctly reject complainants' arguments that the merger would have the effect of raising rates, but the Commission indicated that the merger would likely have the opposite effect.
The Commission expressly found that 'the economies that would be forthcoming in this present merger are considerable. . .,' and that 'the beneficiaries of this merger will certainly be the subscribers of YORK and PRINCETON.' Id. at 145, 295 A.2d at 830.
Unlike in City of York, because of the subsequent enactment of Chapter 30 of the Public Utility Code, merger savings are no longer a factor in determining whether the merger benefits the public in a substantial way. Chapter 30 changed the way rates are set for telecommunication utilities from the traditional cost-based rate base/rate of return method to an inflation-based formula.
Unlike cost-based rate base/rate of return where merger savings would be reflected in rates, under the inflation based method, no savings from the merger are passed onto consumers, but are retained by the company.
As a result, none of the merger savings would flow through to the customers; therefore, those savings do not constitute a basis to find that the merger is in the public interest.