University of Vermont

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Research Connects Campaign Contributions to Utilities Mergers

Vanden Bergh
Richard Vanden Bergh, associate professor of business. (Photo: Rajan Chawla)

Establishing a connection between election campaign contributions and legislative outcomes has been an elusive pursuit for researchers since before Congress banned corporate contributions in 1907. It requires extensive analysis of campaign contributions over time, something Richard Vanden Bergh, associate professor of business, has been doing for the past five years as part of a new study that shows how electric utilities use campaign money to influence regulatory merger approvals.

His findings, based on a statistical analysis of campaign contributions by U.S. electric utilities from 1998-2006, were recently published in the Strategic Management Journal in the article “Integrated Market and Non-Market Strategies: Political Campaign Contributions Around Merger and Acquisition Events in the Energy Sector.” Vanden Bergh and Guy L. F. Holburn, associate professor of business at the University of Western Ontario, found that utilities increased contributions in the year prior to announcing a merger in hopes of preventing state level regulatory agencies from imposing costly merger conditions such as consumer rate reductions, which negatively affect shareholder gains.  

The study specifically targets utilities’ financial contributions to campaign funds of state politicians because, in certain political contexts, they have an incentive to exert indirect influence on legislative committees and state governors who oversee agency decision-making, appointments and budgets. The study’s general thesis and methodological approach has broader implications, however, because it can be applied to other regulated industries such as telecommunications, pharmaceutical or banking.

“When mergers are announced, utilities evaluate the conditions imposed by regulators before making a decision to complete the merger,” says Vanden Bergh, who estimates that about 30 percent of proposed mergers from 1998-2006 didn’t go through. “The politicians get involved and they want to know what the savings are going to be and how they can capture some of them for rate payers by reducing rates instead of benefitting investors. Almost always there’s a sharing of the savings between rate payers and investors. The question (for utilities) is how much savings for the rate payer is too much before a merger is no longer justifiable. This paper isn’t about whether this is good or a bad thing. We don’t make any sort of normative claims about what they should or shouldn’t be doing.”

Immersed in 50-state data

The sheer amount of data Vanden Bergh and Holburn culled over after purchasing it from the Institute for Money in State Politics, a non-profit, non-partisan data warehouse of sorts that gathers campaign contributions at the state level, is mindboggling. It included one million observations and required connecting each campaign contribution by an individual or Political Action Committee (PAC) to a politician, and then tying it to the specific electric utility.

“A lot of my research looks across 50 states, which makes data gathering quite intense,” says Vanden Bergh. “We had to put it in a form we could analyze, so we could say, ‘Here are contributions made by those affiliated with a single utility to all the legislators in that state,' and take it to a more aggregated level. Every state has basically the same regulatory approval process with governors, legislators and public utility commissions, but some are controlled by democrats and republicans and different degrees of competition for power. Our model allows us to sort of isolate these features of the political environment to see if they have an effect on campaign contributions.”

Even in Vermont, where Vanden Bergh says there are very few campaign contributions, tensions ran high when Vermont State utility regulators approved a merger in 2012 between Green Mountain Power, which doesn't make political contributions, and Central Vermont Public Service – the state’s two largest utilities. The Public Service Board assured customers they would share in millions of dollars of savings from improved operational efficiencies, despite rejecting a proposal that would have given customers a direct refund of $21 million.

“There was a big fight over the conditions of the merger; it was very controversial,” says Vanden Bergh. “The uncertainty around these types of conditions creates a lot of political risk. There’s also market risk with mergers because utilities like GMP and CVPS think they’re going to be able to consolidate costs and other reductions. If they don’t realize cost savings but are still required to meet the regulatory approval conditions, they will take a loss. This is why it’s such an interesting phenomenon and why so many utility deals don’t go through. Sometimes the regulatory conditions are so high and so expensive that it makes it untenable to bear the market risk of realizing the benefits.”

Vanden Bergh’s paper also makes a contribution to political strategy research by providing fresh evidence that firms integrate market and nonmarket strategies, defined in this case as interest groups trying to influence the public policy process and the tactics and strategies they use to bring about favorable policy. Vanden Bergh says he and Holburn brought together a market investment with a non-market strategy scientifically to see if utilities were successful at creating the merger simultaneously with the policy process.

“Our research on non-market strategy provides new evidence on how firms proactively manage their external political environment to protect their resources from dissipation by agency regulation.” says Vanden Bergh, who teaches a course on the political environment of business. “The types of models we try to develop would apply to any interest group, not just business. I tell my students that whether you are going to work in business or for a non-profit or an advocacy group, what we’re developing in the course is useful for designing political strategy.”

The intrigue of business and politics

Vanden Bergh’s current research builds on a frequently cited 2006 paper in the Academy of Management Journal that examined whether requested rate increases during more friendly political environments by utilities across 50 states from 1982-1992 translated into differential allowed rates of return. It’s also an outgrowth of a study about accounting firms trying to influence regulation coming out of the Securities and Exchange Commission (SEC). The SEC was concerned that accounting firms were not producing objective financial statements for companies where they were also providing consulting services, which is far more lucrative than the auditing business.

The next phase of research will require even more detailed data analysis and could make some executives a little nervous.

“We’ve expanded the data set so we can look specifically at the executives,” he says. “Since we have all the merger events, we can look at the patterns of their contributions around these mergers and can compare them to both when they weren’t executives, as well as any patterns of contributions for executives who aren’t involved in merger events. The campaign contribution literature has struggled to identify whether contributions are investments or consumption goods, so that’s one area where we hope to make a contribution."