FirstEnergy said it bribed a regulator for $4.3 million. Here’s how it worked.

Decoupling, demystified

By: - July 29, 2021 1:00 am

Davis Bees Nuclear Power Station with electricity pylons, Ohio. Getty images.

FirstEnergy admitted in court documents last week it paid the state’s top utility regulator $4.3 million to use his perch to save the company hundreds of millions via friendly administrative rulings.

The company’s allegation against Sam Randazzo, former chairman of the Public Utilities Commission of Ohio, came in a deferred prosecution agreement with the U.S. Attorney’s office. FirstEnergy agreed to pay a $230 million criminal penalty and admit to a lengthy statement of facts about its conduct. If FirstEnergy meets the terms of the agreement and cooperates with prosecutors, then a charge of honest services wire fraud against the company is dropped.

Last summer, prosecutors accused then-House Speaker Larry Householder, R-Glenford, of secretly controlling a nonprofit wielding $61 million from FirstEnergy, and spending it to bankroll his campaign to become speaker and pass House Bill 6 — a massive bailout worth an estimated $1.3 billion to FirstEnergy, and millions to other utilities in the state. Householder has pleaded not guilty, though two allies in the alleged scheme pleaded guilty to racketeering last fall.

The statement of facts, signed by FirstEnergy CEO Steven Strah and two assistant U.S. Attorneys, shows how enmeshed Randazzo’s alleged conduct as a regulator was with House Bill 6

It states that Randazzo helped draft a “decoupling” provision in HB 6 that made FirstEnergy “somewhat recession proof,” according to its former CEO. It forced ratepayers to guarantee its unusually high 2018 revenue numbers, and pay the difference if they fell below that 2018 baseline.

That provision, worth an estimated $355 million to FirstEnergy in “unearned profit” over five years, was set to expire when FirstEnergy underwent a PUCO-ordered rate review case in 2024.

Randazzo’s job, according to FirstEnergy, was to scrap any requirement that FirstEnergy undergo a rate review, thus protecting one of its windfalls of cash established in HB 6.

Electric security plan

In 2014, FirstEnergy filed what’s known as an Electric Security Plan (ESP).

Utilities can only raise electricity costs for consumers if they undergo a rate review in which they open their books to PUCO.

“They have to open up all their books, we look at everything they recoup from ratepayers, all of their customers, all of the different charges, we look at all of them and then determine what the utility really should be making based on all the things they’re collecting from customers and what their actual needs are to function, run the business, and provide us all with distribution services,” according to Randi Leppla, lead energy counsel for the Ohio Environmental Council.

FirstEnergy has not sought a rate review since 2007. Ohio law doesn’t require utilities to undergo rate reviews at any regular interval.

Instead of a full rate review, a utility can file an ESP in which they propose a specific project and ask PUCO for permission to add costs of that project on ratepayers’ bills as “riders.”

One piece of the 2014 ESP: a “distribution modernization rider” (DMR) that cost FirstEnergy customers between $168 million to $204 million per year. PUCO staff argued it would “serve as an incentive for the companies to upgrade and modernize their distribution systems,” court records state. FirstEnergy began claiming the DMR revenue in 2017.

The PUCO authorized the DMR for three years, with the option for the utility to seek a two-year extension, according to PUCO spokesman Matt Schilling.

As a condition of the ESP, however, the PUCO required FirstEnergy to undergo a full rate review in 2024.

Entities representing ratepayers, manufacturers, and environmentalists mounted a legal challenge against the DMR, which wound up at the state Supreme Court.

Supreme Court

The Supreme Court ruled in a June 2019 decision that the rider didn’t adequately protect ratepayers against misuse of the funds — nothing forced FirstEnergy to actually modernize its distribution.

“The PUCO staff’s wishful thinking cannot take the place of real requirements, or conditions for the use of DMR funds,” wrote Justice Michael Donnelly in a majority opinion.

The ruling stopped FirstEnergy from collecting more money from the rider, but the justices said that no legal mechanism exists to force a refund to consumers from FirstEnergy.

The ruling marked a huge loss for FirstEnergy, but Randazzo retooled the ruling into a win.

Randazzo strikes

Gov. Mike DeWine appointed Randazzo as PUCO chairman in early 2019. The statement of facts says Randazzo, at that point, had received $22 million in consulting fees from FirstEnergy over the prior decade. The final $4.3 million of that sum, according to FirstEnergy, was a bribe for Randazzo to solve its rate review problem.

In November 2019, the PUCO — with Randazzo as chairman — issued a new order denying FirstEnergy’s request to extend the already-nixed DMR. However, PUCO granted the utility a major win that would have been worth hundreds of millions of dollars.

“In light of the changed circumstances, with termination of revenues recovered through Rider DMR … we find that it is no longer necessary or appropriate for the companies to be required to file a new distribution rate case at the conclusion of the companies’ current ESP,” the order states.

With that ruling, FirstEnergy no longer had a rate review looming over its head in 2024.

And what does all this poo-bah have to do with House Bill 6?

House Bill 6 gutted Ohio’s renewable energy and energy efficiency standards; bailed out two 1950s-era coal plants owned by several Ohio utilities; and bailed out two nuclear plants owned at the time by a FirstEnergy subsidiary.

To pass the bill and thwart an effort to repeal it, FirstEnergy dumped $61 million into Generation Now, a dark money nonprofit that has since pleaded guilty to a racketeering charge. Prosecutors say Householder used Generation Now to bankroll his political ascendance and engineer the passage of HB 6.

A lesser-discussed piece of the bill allowed FirstEnergy to adopt a “decoupling” policy that allows it to bill ratepayers for any shortfall in revenue compared to its $978 million in 2018 — its best haul in a decade. Company CEO Chuck Jones told investors it would make a piece of the company “somewhat recession proof.”

The idea of decoupling arose as states required utilities to create energy efficiency standards to help customers conserve electricity, which theoretically would eat into their own customers’ electricity demand. Given HB 6 eliminated the energy efficiency standards, the concern doesn’t apply in this context, according to Rob Kelter, an attorney with the Environmental Law and Policy Center.

“If you remove those programs, there’s no reason for them to have decoupling,” he said.

Analysts hired by the Ohio Manufacturing Association, one of the organizations that challenged the DMR in court, estimated FirstEnergy could collect $355 million in “unearned revenue” between 2020 and 2024 as a result of the decoupling.

According to the text of HB 6, the decoupling provision “shall remain in effect until the next time that the electric distribution utility applies for and the commission approves base distribution rates for the utility.”

FirstEnergy admitted that Randazzo helped write the decoupling section of the bill. An unnamed company executive texted another executive as the bill neared passage that Randazzo told him “decoupling looks good.”

More simply, Randazzo’s PUCO waived a requirement that FirstEnergy file a rate review. He also helped write legislation that delivered FirstEnergy hundreds of millions from ratepayers, all until its next rate review.

“FirstEnergy Corp. paid the entire $4,333,333 to Company 1 for [Randazzo’s] benefit with the intent and for the purpose that, in return, [Randazzo] would perform official action in his capacity as PUCO Chairman to further FirstEnergy Corp.’s interests relating to passage of nuclear legislation and other specific FirstEnergy Corp. legislative and regulatory priorities, as requested and as opportunities arose,” court records state.

“Thank you!!”

The filing details Randazzo meeting FirstEnergy executives at his home in December 2018 to discuss the $4.3 million payment left on his consulting contract and the empty PUCO seat.

In early November 2019, one FirstEnergy executive texted another that Randazzo is “going to make the requirement to file go away, but I do not know specifically how he plans to do it.” Days later, Randazzo indeed made the requirement go away.

One day later, a FirstEnergy executive texted Randazzo to express his gratitude.

“Thank you!!” the executive texted Randazzo, attaching an image of the company’s stock price increasing.

Jennifer Young, a FirstEnergy spokeswoman, declined comment beyond noting that the company will file a rate review by the time their ESP expires in 2024 (PUCO reversed the Randazzo decision in December 2020, after Householder was indicted and FBI agents had raided Randazzo’s home). [Correction: This article originally said the company would file a rate review in 2014, which was a typo.]

What does Randazzo say?

Efforts to reach Randazzo by phone and email have been unsuccessful. He has not been charged with a crime.

In a statement obtained by the Cincinnati Enquirer, he said he did nothing wrong.

“I executed my duties as PUCO Chair conscientiously, lawfully, and mindful of striking the right balance between competing interests,” he said. “At no time prior to or after my appointment to the PUCO was I asked or did I agree to exercise authority as a public official or perform any official action in my capacity as Chair to further FirstEnergy’s legislative, regulatory or other interests,” he said.

“All payments made under the consulting agreement with FirstEnergy, including those relating to its termination, were in accordance with the terms of that agreement, and following review and approval by senior executives at FirstEnergy.”



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Jake Zuckerman
Jake Zuckerman

Jake Zuckerman is a statehouse reporter. He spent three years chronicling the West Virginia Legislature for The Charleston Gazette-Mail after covering cops and courts for The Northern Virginia Daily.