Bribery and Corruption at Utilities Cost Them–and Us–Big

August 31, 2020 | 12:38 pm
Mike Jacobs
Senior Energy Analyst

I spent my summer, and most of my career, working with electric utility rules around energy supplies. I push for adding clean energy and reducing climate-damaging emissions in work with regional grid operators, known as RTOs or ISOs. Politics and energy policies have never been more impactful on these seemingly technical, engineering-oriented grid organizations. The agreement by Exelon’s ComEd company to admit to bribing Illinois state officials (and pay a $200 million penalty) for favorable legislation makes a mess for grid operator PJM. Its credibility is at stake.

When politics and policies become corrupted, as is the case with Exelon’s admitted bribery scheme and prosecution of corruption by utilities in Ohio’s legislature to bail out aging, uneconomic coal and nuclear power plants, RTOs need to respond to protect their credibility in managing the supposedly nondiscriminatory energy markets and transmission systems that they operate. At this moment PJM–the RTO that spans the mid-Atlantic, Illinois and Ohio Valley region–is facing just such a crisis.

Regional grids: Change in the right direction

These organizations were launched in their current form in the late 1990’s to operate electricity markets and the transmission system that make regional electric markets possible.  A regional grid with the consolidation and balancing of supply and demand, and coordination of reserves, is much more efficient and less expensive than the smaller, insular and monopolistic approach that was replaced. For renewables, the grid operators have learned how to succeed with high levels renewables and reductions of coal. With a maybe-mostly-independent board, and a lot more information about prices and operations, RTOs and ISOs have broken down some, even many, of the barriers to changing the grid.

Before I get into the structural and political workings of one RTO, my coworkers at UCS explain from a tour of the California ISO some basic challenges for the grid.  Here is a deeper look into the operations for summer weather when electricity use is highest and the grid is most stressed. Planning for the future is also a vital task for grid organizations, especially when the supply mix is changing.

These are some of the beneficial aspects of the RTO structure. But when crisis hits–for example, when powerful business interests feel threatened by competition from other resources and push for discriminatory rules or start bribing state officials for favorable policy–it also reveals the shortcoming of RTOs to navigate turbulent waters and ultimately protect consumers. Unlike the state public utility commissions that regulate electric companies with public access to information and hearings under open meeting laws, the RTOs and ISOs set their own rules with limited oversight by the Federal Energy Regulatory Commission. PJM has known problems in their governance and decision-making process stemming from structural biases that are now hurting PJM’s ability to respond to these political crises.  PJM’s response to state policies, and now its response to the Exelon and Ohio bribery scandals, have become a test of its legitimacy.

States and members

Different rules for operating energy markets and the transmission system have been adopted in RTOs/ISOs across the country, adding to their differing regional character. PJM, the regional grid and market operator for 13 states plus D.C., has grown to have over one thousand members. PJM is organized as a corporation for members with “Active and Significant Business Interest” in PJM transmission or markets. Members also must pay an annual membership fee of $5,000 (though affiliates of a Member company do not have to pay this fee). These two barriers effectively limit who can vote in PJM governing decisions.

In PJM, state representatives, consumer protection organizations and public interest organizations such as UCS can observe and comment on stakeholder debates, but cannot vote. The governing structure is based on business interests, and Member obligations are defined only in terms of prompt payment of bills and conformance with rules the Members approve for themselves to follow.  There is no public well-being or protection of the public interest built into PJM’s structure or represented in its voting process.

The PJM structure makes governance and interactions with state policies more challenging than for the New York ISO or the California ISO that have just one state. New York and California also have significant legal control and influence over their respective grid operators. Another region, the Southwest Power Pool, has a Regional State Committee, made of state representatives, which determines significant cost and planning questions that are especially relevant to the states.

Voting matters

PJM’s decision-making process is openly recognized as biased. Affiliates and subsidiaries effectively allow a single interest to vote more than once in the process. In a recent example, 163 votes were counted coming from just 39 PJM Members plus 121 affiliates of some of those Members. Exelon has 14 affiliated companies that are Members; First Energy has 15.  The ability to vote with a bloc of affiliated subsidiary companies in the decision-making process brings the ability to influence who can compete with existing companies, the costs and profits in the electric utility business, and ultimately the cost and reliability of the electricity supply.

This problem is widespread. A detailed study of PJM voting rules published in 2017 confirms large companies with multiple Affiliates have the ability to collaborate among business segments, using affiliate voting to block (or advance) proposals from reaching higher level committees. That study notes “some of these issues were identified during the 2009-2011 governance evaluation process, but stakeholder agreement on improvements were not reached.” This is a clear example of the pitfalls of this industry self-regulation and it paints a pessimistic picture for future reform needed for climate protection. However, the PJM Board could act to advance climate issues.

This time is different

The problems today with electric companies that are Members of PJM  implicated and admitting to illegally influencing the voting of elected officials go beyond usual advantage of large companies well-staffed with experts. PJM has a code of conduct which can be applied to the current participation of PJM Members in illegal vote-influencing. PJM’s code includes this: “Violating relevant laws, regulations or this Code, or encouraging others to do so, violates our core values, exposes the company to liability and puts PJM’s reputation at risk and, therefore, may result in disciplinary sanctions. Whenever a potential situation regarding questionable business conduct or ethics is raised, PJM will thoroughly investigate, intervene and take corrective action if necessary.”

To make this law-breaking more complicated, but also more relevant to PJM, the vote-buying was focused on passing state laws that would protect utility-owned power plants from the competition in PJM’s markets. This cost consumers major money. In the Ohio case, PJM presented analysis to Ohio lawmakers in June 2019 showing “with expected new gas units coming online and all FirstEnergy Solutions nuclear units retiring, the wholesale energy market will produce $1.6 billion in annual savings by 2023.”

Why this matters for climate change

For clean energy advocates, this is aggravating because the issue of state policies in the regional grid has been a flashpoint for controversy in the past few years. Every state in PJM has some kind of payments for power supplies outside of the PJM markets. The same is true for New York and New England. State policies for clean energy and climate protection have propelled renewable energy for decades. Only when the owners of nuclear and coal plants extracted payments through legislation to keep uneconomic plants operating did the RTOs and ISOs become aggressive about segregating policy-supported energy supplies from the purportedly “unsubsidized” gas-fired generation. There is a direct connection between the plant owners’ bribe-induced legislation and the chaos over states’ policies, especially clean energy policies.

The way forward

The RTOs have been organized with very limited accountability and little or no mandate to protect the public interest.  In the Mid-Atlantic and Northeast, there is no mechanism for state representatives to even vote on RTO decisions. While RTOs are legally accountable to FERC under the Federal Power Act, there is wide latitude for acceptance of RTO decisions and no protection of climate whatsoever in this framework. Still, the PJM Board could take steps to develop reporting metrics on greenhouse gas emissions in its region.

The imbalanced governance of RTOs has led to RTOs and FERC second-guessing the resource decisions of states, corporations, and ultimately consumers to buy or self-supply the types of resources and services they see as in their best interest. Much of the time this is renewable energy, whether because of its low cost or its clean attributes. RTOs continue to shift the rules in a manner that serves only to increase revenues for one set of sellers and have been granted the authority to pretend certain resources do not exist. This ultimately forces consumers to buy capacity from certain merchant power plants even though that capacity may not be needed given the level of state and local resource procurement. These views are shared by a diverse group of stakeholders.

Such efforts to shield fossil-fired suppliers from the effect of state policies and competition from other resources results in additional customer costs and increased climate damage. Changing the Federal Power Act, the role of public interest in governing the RTOs, and the influence of conglomerate utilities in RTO voting would all help. Governance reforms are discussed in detail here.  Given this new chapter of corporate bribery and political corruption, sanctioning the PJM voting rights of utilities involved in vote-buying should be an immediate first step. Accountability should be a PJM value, and the ultimate energy issue at stake is damage to the climate.