Financial Mismanagement in Energy Utilities

FirstEnergy Scandal

Energy utilities have immense power due to their monopoly status. Because of the vertically integrated nature of energy companies in the United States, a single utility generally serves an entire geographic area, meaning consumers have no choice in where to buy their power. More than 70 percent of energy consumers in the United States are currently served by an Investor-Owned Utility (IOU), meaning a company that pays dividends to investors, unlike public or cooperatively-held utilities.

This financial structure creates a profit incentive that discourages investment in new power plants and other clean energy efforts. Most utilities have historically relied on coal and other fossil fuels to generate power and have resisted transitioning to renewable energy sources that can be inconvenient or expensive to develop.

As a recent spate of cases shows, utilities may resort to bribery, fraud and other types of corruption to protect their bottom line – like in the case of FirstEnergy Solutions in Ohio. Examples of potential utilities fraud include misrepresenting financial expenditures to government regulators and investors and the misuse of public securities like municipal bonds and pension plans.

This corruption often violates federal securities law. However, without inside information, it can be difficult to determine that wrongdoing has occurred. As further pressure on the utility sector grows, increasing the risk for fraud, whistleblowers will be crucial to exposing such corruption.

To encourage those with inside information to step forward, the Dodd-Frank SEC Whistleblower program allows whistleblowers to confidentially report companies who are misrepresenting expenditures and other securities violations, and whistleblowers who provide original information that leads to successful SEC prosecution can receive between 10% and 30% of monetary sanctions.

FirstEnergy and Generation Now

FirstEnergy is an IOU headquartered in Akron, Ohio that operates several electricity generation and distribution subsidiaries throughout the Midwest and Mid-Atlantic. Like many utilities, FirstEnergy has long faced declining revenues due to competition from renewable energy and lower demand.

The company was particularly concerned about costs associated with two nuclear power plants operated by its subsidiary Ohio Edison, which was spun off into another subsidiary through a 2018 bankruptcy process. The subsidiary, named FirstEnergy Solutions, held a stake in another energy company losing money on its two failing coal-energy plants.

In light of these financial pressures, FirstEnergy executives began a relationship with Larry Householder, a former state legislator who was determined to reenter politics and had his eye set on the Ohio House of Representatives speaker’s position. The company gave Householder use of its corporate jet to attend President Donald Trump’s inauguration and shortly thereafter began depositing hundreds of thousands of dollars into a bank account of Generation Now, a political action committee launched by Householder. In total, FirstEnergy contributed more than $30 million to the group.

According to an affidavit filed by the FBI, Generation Now became a $60 million slush fund for Householder, who used it to lobby for legislation that benefitted donors and to help elect other state politicians who would support his bid for speakership. Under federal law, “dark money” groups like Generation Now do not have to disclose their donors.

A prime example of legislation bankrolled by Generation Now is House Bill 6, a law called the “worst energy policy in the country” by climate policy experts. The bill added a surcharge to consumers’ rates to subsidize coal and nuclear energy, while cutting efficiency standards for power plants as well as incentives for solar, wind and other renewable sources of energy.

Generation Now paid for advertising and lobbyists to push the bill, and Householder personally shepherded it through passage. The rate increases are projected to cost Ohio consumers $170 million annually. Since the energy efficiency standards wiped away by HB 6 saved consumers an estimated $5 billion over the past decade, according to the Midwest Energy Efficiency Alliance, the bill could cost Ohioans nearly $7 billion over the next ten years.

In July 2020, the FBI arrested and charged Householder and four political consultants with federal and state bribery, money laundering, and racketeering related in part to their relationship with FirstEnergy. Following the affidavit’s release, FirstEnergy fired its top management and pledged to stop donating to politicians and political groups. The scandal caused the company’s stock price to plunge, leading to several shareholder lawsuits.

FirstEnergy faced further issues when a whistleblower came forward with further evidence of securities fraud. The whistleblower, Michael Pircio, had worked as an auditor for Clearsulting, a firm that had assisted FirstEnergy with an internal audit. Following news of Householder and others’ indictments, Pircio reviewed the audit and observed potential securities violations. He forwarded the information to the SEC. Following this disclosure, the SEC launched an investigation into FirstEnergy in September 2020

While the scope of the SEC investigation is unknown, potential violations could include misrepresenting financial expenditures to government regulators and investors and the misuse of public securities like municipal bonds and pension plans. The SEC investigation is being conducted by its public finance unit, which handles cases that allege corruption involving publicly traded companies, municipal securities and public pension plans.

Notably, FirstEnergy holds $2 billion worth of municipal bonds, the value of which increased under the new funds provided by HB 6, and its shares are held by pension plans like the New York State Common Retirement Fund, which filed a shareholder complaint to force the company to disclose political spending.

As for Pircio, since making his report to the SEC, he has alleged whistleblower retaliation from FirstEnergy and Clearsulting, which is prohibited under the Dodd-Frank’s anti-retaliation provisions. His case is currently pending.

Key Takeaways

FirstEnergy is only one sensational example in a string of corruption scandals among utilities. In July 2020, the Chicago utility Commonwealth Edison paid the U.S. Department of Justice  (DOJ) $200 million to settle charges that the company provided jobs and contracts to associates of a state lawmaker in exchange for legislation that provided the utility more favorable rates.

Earlier that year, the SEC filed a civil lawsuit against the SCANA Corporation, charging the company misled investors and regulators about the costs of a $10 billion nuclear power plant the company planned to build  then abandoned.

A few years earlier in 2017, the SEC investigated the Southern Company utility for misleading investors and the federal government about the costs of a carbon capture project in Kemper, Mississippi, which doubled in cost to more than $7 billion and was ultimately scaled back to become a standard gas power plant.

The Kemper debacle demonstrates the role that whistleblowers can play in stopping fraud at utilities. Revelations about the project’s cost and schedule overruns were first brought to public attention by a Southern Company engineer named Brett Wingo, who was fired by the company in retaliation. Wingo responded with a lawsuit against Southern Company that charged violations of the Dodd-Frank Act in addition to state laws.

The Dodd Frank Act utilized by both Pircio and Wingo is an extremely powerful whistleblower reward law, including strong protections and incentives for securities, commodities, and corrupt practices whistleblowers. As recent history shows, it could play a key role in combatting fraud in the U.S. utility sector.

Report Climate Crimes