CAMBRIDGE, Massachusetts -- The allegations, if true, of bribery and unlawful lobbying by regulated utilities and affiliates to pass a bill requiring all Ohio electric consumers to pay a surcharge to provide subsidies for nuclear and coal plants (not all of them in Ohio) may pose a fundamental threat to the state’s regulatory system. While the substance of the House Bill 6 legislation is questionable, given its bestowing more private than public benefits and its adverse impact on the electricity market, the charges related to unlawful lobbying for its passage raise critical issues for both prosecutors and state regulators.
Based entirely on the public record, the situation demands accountability. Criminal prosecution, alone, is insufficient. There are important issues that go to the functionality and integrity of the Ohio’s regulatory process.
The two most critical issues are:
1. Whether ratepayer money was used for lobbying and/or bribery; and
2. Possible deficiencies in corporate governance.
The Public Utilities Commission of Ohio (PUCO) cannot stand by while the credibility of the regulatory process is eroded. It has tools which have been used in the past that should be deployed without disrupting the ongoing criminal investigations.
The first issue is the source of money for lobbying and/or alleged bribery. The governing principle, of which breaches have occurred in the past, is that, while a utility can use its own funds, no ratepayer money can be used to lobby, much less bribe, public officials on its behalf. It is not clear in the public record from where the money used to carry out the activities described in the in the indictment and related documents came from, but it is crystal clear that full public accounting for any nontrivial amounts is necessary.
A transparent, detailed financial audit is needed to paint the money trail that definitively establishes whether funds used for lobbying or alleged bribery came from ratepayers. If none did, it is important to establish that in the public record. If, on the other hand, significant ratepayer dollars were used, then the PUCO should make that public and decide how to compensate consumers for misuse of their money. The PUCO should order and oversee such an audit by competent, independent personnel.
In regard to corporate governance, regulation depends on a triad of regulators providing economic signals to regulated company boards, who, in turn, take those signals and use them to set objectives and policies for management. If that triad is functional, regulators refrain from undue interference in internal corporate affairs.
When there is evidence that the triad is broken, regulators can and should intervene.
During my tenure at the commission, the PUCO did so twice -- to rectify exceptionally poor service by General Telephone, and to end the purchase of above-market-priced natural gas from corporate affiliates by Columbia Gas (which culminated in the PUCO removing the company’s board).
The tool used on both occasions was a management audit.
Ashley C. Brown is a former two-term commissioner of the Public Utilities Commission of Ohio.
It is not clear on the public record how the corporate governance system functioned at any involved utility, but the information in the public record constitutes, at a minimum, a prima facie case of a breakdown at companies on two fronts, at least where the involvement was nontrivial or merely reactive. The first relates to compliance with applicable law and ethics. The second is whether the legally required wall between the utility and its generating affiliates was breached.
Both matters are essential elements of a functional regulatory system and a competitive electricity market. If breakdowns occurred, they must be unmasked, and made transparent, with an eye toward remedying the deficiencies identified. An independent management audit of what occurred and of the corporate processes is imperative if the regulatory system itself is to be fully functional.
Ashley C. Brown is executive director of the Harvard Electricity Policy Group at the Kennedy School at Harvard University. He served two full terms as a PUCO commissioner from 1983-1993. He also co-authored The World Bank’s Manual for Evaluating Infrastructure Regulation. The views expressed are his alone.
Disclosure by the author: American Electric Power is a current contributor to the Harvard Electricity Policy Group. FirstEnergy and Duke Power have contributed at various times in the past, but do not do so currently.
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