What Corporate Veil?

Review of Adam Winkler\u27s We the Corporations: How American Business Won Their Civil Rights

Zombie Energy Laws

This Article traces the development of three legal rules—cost recovery for vertically integrated utilities, the requirement that regulators assess the financial viability of energy projects before issuing a certificate of public convenience and necessity, and the filed rate doctrine—that emerged out of the view that electric power companies should be shielded from market forces. It argues that important elements of these legal rules have become “zombie energy laws.” Zombie energy laws are statutes, regulations, and judicial precedents that continue to apply after their underlying economic and legal bases dissipate. Zombie energy laws were originally designed to protect consumers by, among other things, preventing utilities from exploiting their market power. Today, however, they protect incumbent fossil fuel generators and have provided the legal basis for invalidating billions of dollars of wind and solar projects. Thus, energy laws that emerged to mitigate market power abuses under the old system of utility rate regulation now entrench incumbent market power and are impeding the transition to a cleaner energy system. In this way, zombie energy laws are protecting incumbent energy companies from traditional tort, contract, and antitrust laws that prevent firms operating in ordinary industries from acting anticompetitively. This Article concludes by arguing that the Federal Power Act, which instructs the Federal Energy Regulatory Commission to maintain “just and reasonable” wholesale rates, can plausibly be read to mitigate—and, in some cases, eliminate—the market distortions caused by zombie energy laws. The Act’s meaning should be construed to fit the market structure to which it is being applied

Hidden Value Transfers in Public Utilities

Many electric utilities in the United States own rate regulated and non-rate regulated subsidiaries. The rate regulated subsidiaries enjoy legal monopolies and a right to a return on their capital investments but are only allowed to charge regulatorily authorized rates. The non-rate regulated subsidiaries participate in competitive markets and are generally free to earn whatever profits they can but are subject to the threat of displacement by other enterprises. Many electric utilities in the United States own rate regulated and non-rate regulated subsidiaries. The rate regulated subsidiaries enjoy legal monopolies and a right to a return on their capital investments but are only allowed to charge regulatorily authorized rates. The non-rate regulated subsidiaries participate in competitive markets and are generally free to earn whatever profits they can but are subject to the threat of displacement by other enterprises. This Essay describes some strategies vertically integrated electric utilities use to transfer value from rate regulated affiliates to non-rate regulated affiliates. First, regulated utilities directly subsidize non-regulated affiliates by entering into favorable contracts with affiliates that participate in competitive markets. These contractual value transfers include favorable purchase agreements such as long-term contracts to buy coal at above-market prices and cross-affiliate debt guarantees that allow non-rate regulated affiliates to borrow at a discount. Second, utilities receive regulatory authorization to pass costs incurred by their non-rate regulated affiliates onto captive ratepayers. Examples of regulatorily approved value transfers are fuel adjustment clauses that authorize recovery of fuel costs from captive ratepayers and self-insurance that forces ratepayers to bear wildfire risk and transmission outages (even when insurance requirements are supposed to protect them from those risks). Third, utilities make investment decisions in rate regulated markets that favor their non-rate regulated affiliates. For example, utilities may invest (or refuse to invest) in transmission capacity to protect the market power of their generation assets—not to reduce energy prices, improve grid reliability, or connect to low-carbon energy sources. Utility value transfers thus make the grid less efficient, less reliable, more difficult to supervise, and more resistant to policy instruments that should encourage decarbonization

Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets

In this article, we make several contributions to the literature on appraisal rights and cases in which courts assign values to a company\u27s shares in the litigation context. First, we applaud the recent trend in Delaware cases to consider the market prices of the stock of the company being valued if that stock trades in an efficient market, and we defend this market-oriented methodology against claims that recent discoveries in behavioral finance indicate that share prices are unreliable due to various cognitive biases. Next, we propose that the framework and methodology for utilizing market prices be clarified. We maintain that courts should look at the market price of the securities of a target company whose shares are being valued, unadjusted for the mews of the merger, rather than at the deal price that was reached by the parties in the transaction. In our view, unadjusted market price has two distinct advantages over deal price. First, the unadjusted market price automatically subtracts the target firm\u27s share of the synergy gains and agency cost reductions impounded in the deal price. This is appropriate to do because dissenting shareholders in appraisal proceedings are not entitled to these increments of value that are supplied by the bidder and it is difficult to accurately ascertain the proportion of the deal price that is attributable to these increments of value. Second, the unadjusted market price is unaffected by any flaws in the deal process that led to the ultimate merger agreement. Recently, commentators have contended that deal prices in merger transactions should be ignored in appraisal cases where there are flaws in the process that led to the sale. However, flaws in the sales process are not reflected in the unadjusted market price, so such prices are valid indicators of value, regardless of whether there were flaws in the deal process. Further, no deal process is perfect, and ignoring market prices when a deal process is flawed succumbs to what economists call the Nirvana fallacy, which posits that an analytical approach (such as relying on market prices) should not be ignored or abandoned even if using that approach does not produce perfect results. Rather, an analytical approach should be used if it is better than the available alternatives and provides useful information to a tribunal or policymaker. Finally, we extend our analysis of market efficiency to a new domain. We point out that market prices can be used even when shares of non-publicly traded target companies are being evaluated to determine whether the acquirer paid a fair price in certain cases by examining the share price performance of the acquirer\u27s shares. In cases where a bidder has paid an unfairly low price for the target\u27s shares due to self-dealing, incompetence, or inattention on the part of the seller, the acquirer\u27s stock should react positively to the announcement of the transaction if the transaction is significant. In the absence of such a positive share price reaction on the part of the acquirer, the price should be deemed presumptively fair. This analysis seems particularly apt in situations where there is a dc line in the value of the bidder\u27s stock upon announcement of an acquisition

The Promise & Perils of Open Finance

We are at the dawn of a new age of Open Finance. Open Finance seeks to harness the potential of new platform technology to enhance customer data access, sharing, portability, and interoperability—thereby leveling the informational playing field and fostering greater competition between incumbent financial institutions and a new breed of financial technology (fintech) disruptors. According to its proponents, this competition will yield a radical restructuring of the financial services industry, offering more and better choices for consumers looking to make fast payments, borrow money, invest their savings, manage household budgets, and compare financial products and services. The promise of Open Finance is very real. Yet its proponents have largely ignored the economics driving the development of the key players at the heart of this new infrastructure: data aggregators. Data aggregators are the connective tissue of Open Finance—the pipes through which most of this valuable data flow. Like other types of infrastructure, these pipes are characterized by economies of scale and network effects that erect substantial barriers to entry, undercut competition, and propel the market toward monopoly. In the United States, these dynamics are compounded by the highly fragmented structure of both the conventional financial services industry and the emerging fintech ecosystem. The result is an embryonic market structure in which a small handful of data aggregators have a massive head start, and where one company in particular—Plaid—already enjoys a dominant market position. This Article describes the promise and perils of Open Finance and explains how policymakers can tap into its potential while simultaneously preventing the abuse of monopoly power and avoiding the creation of a new strain of too-big-to-fail institutions

Checks, Not Balances

Critics of the administrative state who would revive the nondelegation doctrine and embrace the unitary theory of executive power often assume that each branch’s powers are capable of precise definition, functionally distinct from the others, and that the formal boundaries between each branch are sacrosanct. This Article situates these critiques in Founding Era and nineteenth century debates about the structure of the Constitution. In the 1780s, the AntiFederalists objected to the Constitution for failing to enumerate a precise taxonomy of each branch’s powers, for failing to specify that each branch’s powers were exclusive, and for failing to make government officials sufficiently accountable to the voting public. The drafters responded that the Anti-Federalist approach would neither support effective government nor prevent the branches from acting tyrannically. Rather than develop a scheme of discrete and precisely divided powers, as the Anti-Federalists proposed, the drafters preferred precise rules of inter-branch coordination to ensure that no one branch dominates the others. This debate continued throughout the nineteenth and early twentieth centuries, with influential legal minds such as Daniel Webster and Joseph Story rejecting the Anti-Federalist theory of separation of powers. We call this a theory of separation of powers based on a principle of antidomination. On this view, the separation of powers is breached only if one branch deprives another of its procedural capacity to check the others. We further argue that this theory (a) provides a plausible account of the Framers’ understanding; (b) has had significant purchase in the development of interbranch relations since the Founding and thus can serve as a kind of rational reconstruction of historical practice; and (c) is consistent with the relevant constitutional text and the overall constitutional structure

The Corporate Governance of Public Utilities

Rate regulated public utilities own and operate one-third of U.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 high-profile corporate scandals. They have bribed regulators to secure subsidies for coal-fired generators and nuclear reactors. They have caused wildfires and coal ash 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. But the theoretical premise that underlies the American system of corporate governance does not apply to public utilities. Rate regulation limits the value shareholders receive when a firm innovates or reduces costs. It therefore converts shareholders into fixed claimants with the same incentives creditors have in non-utility industries. Because ratepayers, not shareholders, receive the residual value the firm generates beyond what it owes to its fixed claimants, standard corporate law theory suggests that public utilities should be run to advance ratepayer and not shareholder interests. The implication is that managers and directors of public utilities should owe fiduciary duties to their ratepayers, that ratepayers should be represented on the corporate boards of 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

The Corporate Governance of Public Utilities

Rate-regulated public utilities own and operate one-third of U.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 high- profile corporate scandals. They have bribed regulators to secure subsidies for coal-fired generators and nuclear reactors. They have caused wildfires and coal- ash 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. But the theoretical premise that underlies the American system of corporate governance does not apply to public utilities. Rate regulation limits the value shareholders receive when a firm innovates or reduces costs. It therefore converts shareholders into fixed claimants with the same incentives creditors have in non-utility industries. Because ratepayers, not shareholders, receive the residual value the firm generates beyond what it owes to its fixed claimants, standard corporate law theory suggests that public utilities should be run to advance ratepayer and not shareholder interests. The implication is that managers and directors of public utilities should owe fiduciary duties to their ratepayers, that ratepayers should be represented on the corporate boards of 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