FirstEnergy’s admissions feed critics’ call for big-picture regulatory oversight and review

The company’s revelations about Ohio’s largest corruption case raise questions about the integrity of the regulatory process and its piecemeal approach to reviewing utility spending.

By Kathiann M. Kowalski

This story is from the Energy News Network in collaboration with Eye on Ohio, the nonprofit, nonpartisan Ohio Center for Journalism. Please join Eye on Ohio’s  free mailing list or the mailing list for the Energy News Network as this helps The Tremonster provide more public service reporting.

The Public Utilities Commission of Ohio should conduct a big-picture, in-depth review of FirstEnergy’s spending and governance in light of the company’s admissions last month about former PUCO Chair Sam Randazzo, critics say.

“It’s not a debate anymore whether the company engaged in corruption,” said Howard Learner, executive director of the Environmental Law & Policy Center. “The company did so. With this pervasive corruption, the PUCO needs to mind the store in order to protect the public interest and to protect consumers.”

On July 22, FirstEnergy admitted it used nonprofit entities “to conceal payments for the benefit of public officials and in return for official action.” A federal court filing on the same day details multiple interactions with and payments to former House Speaker Larry Householder, who faces criminal charges for an alleged $60 million conspiracy to pass and defend House Bill 6. That nuclear and coal bailout law gutted Ohio’s clean energy standards.

The federal court filing also details FirstEnergy’s dealings with Randazzo. The former PUCO chair helped shape HB 6, and his companies received approximately $22 million from FirstEnergy entities from 2010 through 2019. According to the filing, FirstEnergy increased those payments in 2015 in exchange for Randazzo having his longstanding client, Industrial Energy Users-Ohio, drop opposition to an earlier nuclear and coal bailout plan.

FirstEnergy paid the last $4.3 million shortly before Randazzo became PUCO chair in 2019. “In return, [Randazzo] would perform official action in his capacity as PUCO Chairman to further FirstEnergy Corp.’s interests,” the filing said. That included work on HB 6 and “other specific FirstEnergy Corp. legislative and regulatory priorities, as requested and as opportunities arose.”

Ohio Attorney General David Yost has now sought to add Randazzo, two of his companies, and former FirstEnergy executives Chuck Jones and Michael Dowling to a state court civil action. But questions remain about how FirstEnergy routed the money, what amounts may have come from ratepayers, and how to prevent future abuses.

“What’s really needed is a more comprehensive investigation — at least of FirstEnergy’s operations and spending related to these various corruption schemes in Ohio, which seem to fall most directly under the PUCO’s venue,” said Dave Anderson, policy and communications manager for the Energy and Policy Institute.

‘The taint of corruption’

Soon after Randazzo resigned from the Public Utilities Commission of Ohio last November, the Environmental Law & Policy Center asked the PUCO to conduct new proceedings in several FirstEnergy cases.

“FirstEnergy’s payment of $4 million to former Chair Sam Randazzo shortly before he took over as chair of the commission is simply wrong as a matter of law, wrong as a matter of fairness, wrong as a matter of common sense,” Learner said. “It tainted PUCO’s decision-making process and injected serious concerns of bias or at least the appearance of bias.”

In the wake of FirstEnergy’s admissions, the cases “should be reopened and reexamined to remove the taint of corruption,” Learner said.

Asked if the PUCO would reconsider that ruling or conduct a broader inquiry now, spokesperson Matt Schilling noted that the commission had already denied the Environmental Law & Policy Center’s motion on Dec. 30.

A FirstEnergy spokesperson declined to comment for this story. Neither Randazzo nor an attorney believed to represent him responded to requests for comment.

Former PUCO commissioner Ashley Brown, who now heads up the Harvard Electricity Policy Group, said the multiple cases Randazzo acted in are now “contaminated.” The chair has significant control over the commission’s agenda, he added.

Schilling also noted that the PUCO already has several ongoing cases looking at FirstEnergy’s political spending or HB 6. Each case is very limited, however.

“The commission has routinely stated, ‘[while we are] aware of reports containing allegations against FirstEnergy Corp. regarding its conduct in the passage of HB 6 and the subsequent referendum, we are determined to act in a deliberate manner, based upon facts rather than speculation, and with due consideration to the limits on our statutory authority over FirstEnergy Corp. and over the political and charitable activity of all public utilities in this state,’” Schilling said.

“The administrative law judges have said a few times during prehearing conferences they have no intentions of interfering with or getting ahead of a DOJ criminal investigation,” Schilling added.

However, last month’s federal court filing has arguably resolved the criminal claims stated in it against FirstEnergy. Under its deferred prosecution agreement, FirstEnergy must honor several commitments, including payment of a $230 million fine and various corporate governance matters to be performed over a three-year period. So far, Ohio Attorney General Yost has only filed civil claims in state court.

Randazzo’s “decades-long history of advocating against clean energy” raised concerns even before Gov. Mike DeWine appointed him in 2019, and decisions during his tenure confirmed those “deep biases against renewable energy and energy efficiency,” said Miranda Leppla, vice president of energy policy for the Ohio Environmental Council.

“Given the egregious bribery claims as part of the deferred prosecution agreement, there are serious questions about the former PUCO chair’s influence over each case he presided, which are possibly tainted by corrupt ties to FirstEnergy,” Leppla continued. “There should be a full investigation of each and every one of the rulings to ensure there was no corrupting influence and to restore the public’s trust in state government.”

A ‘piecemeal approach’

After the arrests of Householder and others last summer, the Office of the Ohio Consumers’ Counsel renewed calls for a full investigation into how FirstEnergy spent a no-strings-attached rider from its earlier bailout case, along with a detailed review of whether any ratepayer money was spent for political and charitable activities, or on HB 6.

Instead of forcing FirstEnergy to hire an independent auditor, PUCO hearing examiner Gregory Price first took the baby step” of telling FirstEnergy to show that it didn’t improperly use consumer money or violate any laws or PUCO orders in activities related to HB 6. The PUCO finally ordered a full audit of the no-strings-attached rider on Dec. 30.

Meanwhile, on Sept. 30, 2020, FirstEnergy had filed an affidavit from Santino Fanelli, its director of rates and regulatory affairs, categorically denying that its utilities had “included, directly or indirectly, any H.B. 6 costs in any rates or charges paid by ratepayers in Ohio.”

The Ohio Consumers’ Counsel wanted Fanelli to answer questions under oath last October, but FirstEnergy fought against it and the questioning didn’t take place until March. Even then, Price ruled that Fanelli didn’t have to answer questions about the no-strings-attached rider, because that charge was part of a separate PUCO case.

“Taking this piecemeal approach means we aren’t getting a full picture of the utility’s operations,” Leppla said. “As a result, the PUCO may very well overlook, or completely miss, certain pieces of this unprecedented and complex scandal.”

Parts of the puzzle already suggest that the big picture would indeed be complex.

On Aug. 3, the PUCO announced in one of the pending cases that FirstEnergy’s utilities had improperly charged customers for about $6.6 million out of $24.5 million under review there. The audit also found that roughly $7.4 million of expenses had improperly been listed as capital costs and shouldn’t be part of the company’s rate base for future ratemaking.

FirstEnergy finally supplemented its filing on Aug. 6. But it only admitted to a “total revenue impact” of $14,534, for “pole attachment rates.”

Other amounts from the last $4.3 million paid to Randazzo’s company would have bumped up the base on which customers pay FirstEnergy’s utilities an approved rate of return. However, FirstEnergy’s filing said, caps on those charges had already been reached. In other words, the company apparently used a regulated rate category to hide part of a bribe, which would have bumped up customer charges if FirstEnergy hadn’t already maxed out recoverable amounts for the category. And the company seems to suggest it shouldn’t matter to the PUCO as long as customers didn’t pay more.

“We do now have a document — an audit — that shows that FirstEnergy, through various accounting tricks, improperly allocated questionable spending to accounts that allowed them to either recover or attempt to recover certain expenses from ratepayers,” Anderson said.

On the flip side, the PUCO audit only looked at specific charges and riders. And much of FirstEnergy’s spending remains shrouded in mystery.

“You can look at the deferred prosecution agreement, in which FirstEnergy admitted to paying $22 million to Randazzo’s firm,” Anderson said. “It’s quite a washing of money going from $22 million to $14,000, and a lot of complicated stuff happening in between.” In other words, most of the $22 million is still not accounted for.

Other pending cases are looking into separate riders and charges with varying degrees of detail and scope. On July 23, however, FirstEnergy’s lawyers asked the PUCO to extend the calendars in four cases by 90 days, presumably to allow for settlement talks.

“This is money that consumers deserve to have back in their pockets and that FirstEnergy has been holding anywhere from four to nine years now,” Consumers’ Counsel attorney Christopher Healey said during an Aug. 2 prehearing conference.

Price rescheduled the hearing for those cases for the end of November, with monthly status updates before then. A resolution is unlikely before next year.

“They seem to be just piecemealing things and going very slowly with it,” Brown said. “You can’t compartmentalize this stuff.” In his view, the PUCO also should consider FirstEnergy’s compliance history for purposes of determining its utilities’ allowable rate of return.

“I can’t speculate on how the staff or commission will analyze future applications,” Schilling said.

‘The kindest thing’

FirstEnergy’s Aug. 6 update to the utilities commission also claimed it didn’t know about the improper charges noted there before July, despite its blanket denial last September.

“The kindest thing you could say about the FirstEnergy board is that they’re negligent,” Brown said. In his view, the PUCO should exercise more oversight over the company and its utilities’ governance.

FirstEnergy’s agreement with the Department of Justice does call for it to review its corporate policies and accounting procedures to make sure it complies with federal law and “to ensure the maintenance of fair and accurate books, records, and accounts.” Those reforms are supposed to include a review of lobbying and consulting contracts, as well as independent audits and periodic reviews.

On paper, FirstEnergy’s existing policies and procedures should already have prevented the activities it admitted to, Brown said. And the July 22 filing specifies that the deferred compensation agreement with the federal government does not bind “any state or local law enforcement or regulatory agency.”

Technically, the PUCO’s authority extends to utilities that provide regulated utility services to customers in return for a monopoly for a designated area. In this case, that would be FirstEnergy’s three wholly-owned subsidiaries, Ohio Edison, Toledo Edison and the Cleveland Electric Illuminating Company. However, FirstEnergy has full control over those companies, and multiple activities are coordinated through other FirstEnergy affiliates, such as the FirstEnergy Service Company.

And precedent exists for such oversight, Brown said. Back in 1985, the PUCO made Columbia Gas add more Ohioans and more independent directors to its board. The commission had found the company “stalled and delayed” on switching to lower-cost natural gas suppliers instead of its own more expensive affiliates.

“We intend to serve as critics of the utilities we regulate. Our objective is to ensure quality at a fair price,” PUCO Chair Thomas Chema wrote in the agency’s annual report for 1986. Later in that report, he noted the commission’s view “that the reorganized Board would pursue prudent, independent good management” with more independent, outside directors.

FirstEnergy’s utilities are now separated from FirstEnergy Solutions, now known as Energy Harbor. However, the July federal court filing shows that corporate actions aimed to help that former generation affiliate even after the utilities theoretically had separate boards. And FirstEnergy Solutions’ bankruptcy arguably helped FirstEnergy.

The PUCO’s “entire purpose is to ensure Ohioans have access to fairly priced, reliable utility services,” Leppla said. “It is squarely in their purview to be undertaking an investigation into FirstEnergy’s conduct as to whether that’s happening, especially after finding out that the public utility bribed public officials and regulators.”

“In light of all the indictments and revelations regarding FirstEnergy’s illegal corporate activities, the PUCO absolutely should be minding the store … when it comes to corporate governance,” Learner said. “It’s not a theoretical matter. There has been illegal action that has been found and admitted to at the highest levels of FirstEnergy.”

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