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40 Yale J. on Reg. 569 (2023)
The Corporate Governance of Public Utilities

handle is hein.journals/yjor40 and id is 573 raw text is: The Corporate Governance of Public Utilities Aneil Kovvalit & Joshua C. Macey 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 t Associate Professor, Indiana University Maurer School of Law, Bloomington. tt Assistant Professor, University of Chicago Law School. We thank Yair Listokin, Ari Peskoe, Roy Shapira, Anup Malani, Ganesh Sitaraman, Shelley Welton, Tony Casey, David Weibach, John Morley, Kobi Kastiel, Ofer Eldar, Elizabeth de Fonteney, Michael Frakes, Hajin Kim, and participants in the Tel Aviv Corporate Law Workshop, the Duke Law and Economics Workshop, and the 2023 Networks, Platforms, and Utilities Conference at Vanderbilt Law School for helpful comments and conversations. 569

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