Rate regulated public utilities supply one-third of the electricity in the United States and own nearly all of the transmission and distribution lines that transport electricity to meet customer needs. Recently, they have also been at the center of high-profile corporate scandals. FirstEnergy and ComEd, for example, have been accused of bribing regulators to receive favorable treatment for coal-fired generators and nuclear reactors. PG&E pled guilty to eighty-four counts of manslaughter for its role in California wildfires. Utilities across the country have emerged as powerful opponents of state and federal climate action.

While none of these scandals can be attributed to a single cause, they are all, at least in part, failures of corporate governance. Corporate governance mechanisms are generally designed to encourage directors and officers to focus on generating financial returns for shareholders. That is because shareholders are normally considered the “residual claimants” on the corporation: shareholders have a claim on what is left over after the corporation has collected revenue from its customers and met its legal obligations to regulators, creditors, and workers.  Because shareholders are entitled to the firm’s residual value, they normally internalize the consequences of corporate decisions. If a corporation delivers better products or invests in a more efficient technology, the shareholders profit. If the corporation loses market share to competitors that offer better or cheaper service, or if it experiences increased costs due to its failure to meet regulatory obligations or invest in efficient technologies, the shareholders are the first to take a financial loss. Creditors, by contrast, cannot collect more than they are contractually owed, and they lose the value of their investment only if the firm experiences financial distress. For these reasons, corporate governance mechanisms focus managers and directors on shareholder concerns. Shareholders elect the board of directors, which hires managers that—like the directors—owe fiduciary duties to the shareholders. The market for corporate control focuses on shareholder interests.

In The Corporate Governance of Public Utilities, forthcoming in the Yale Journal on Regulation, we argue that this justification for shareholder power does not apply to rate regulated public utilities. Public utilities typically possess exclusive franchises to sell and transport electricity. They operate monopoly franchises in their service territories and are limited—and often entitled—to a set rate of return on their investments. These two features mean that ratepayers, not shareholders, receive whatever value utilities generate beyond what regulators allow the utility to deliver to its shareholders. When this value manifests in the form of reduced costs, whatever residual value exists beyond what shareholders are owed goes to ratepayers in the form of lower bills. When value manifests in the form of innovative products that reduce carbon emissions or increase grid reliability, it is again ratepayers who benefit in the form of cleaner air and a more reliable supply of electric energy.

Read more at Harvard Law School Forum on Corporate Governance