A state utility regulator in Ohio acted “at the request or for the benefit” of FirstEnergy “as a consequence of receiving” a $4.3 million payment from the utility company shortly before their appointment, FirstEnergy disclosed in statements found buried in agreements it reached with lenders in November.
Christopher Pappas, the independent executive director for FirstEnergy board, later disclosed on an earnings call last month that the $4.3 million payment improperly resulted in “amounts collected from customers,” as did other transactions that Pappas told financial analysts “could” have included money for lobbying and political activities.
FirstEnergy first privately disclosed the $4.3 million transaction to lenders on or before November 17 of last year, according to agreements signed by the company’s treasurer Steven R. Staub and lenders. The agreements were dated and went into effect one day after the FBI searched a Columbus townhouse owned by Samuel Randazzo, the chairman of the Public Utilities Commission of Ohio, on November 16.
Randazzo resigned days later, after FirstEnergy first publicly disclosed the payment in a quarterly report filed with the Securities and Exchange Commission on November 19. Copies of FirstEnergy’s November 17 lender agreements were included as exhibits to the quarterly report, and can be viewed here and here.
FirstEnergy’s initial disclosures to lenders about the payment were found in statements on the bottom pages of the wordy November 17 agreements. Those disclosures included key details, highlighted below, later omitted from the company’s other more widely reported public statements about the transaction:
Payment by FE in January 2019 to an individual (the “Individual”) or the consulting firm related to such Individual of approximately $4.3 million in connection with the termination of a purported consulting agreement (which had been in place since 2013) and the conduct corresponding to such payment of such consulting firm and the Individual (acting at the request or for the benefit of FE as a consequence of receiving such payment) and of FE (or any of FE’s directors, officers or employees) during the time period after such payment during which the Individual was acting in any governmental or regulatory capacity, in each case, as previously disclosed to the Administrative Agent and the Lenders on or prior to the date hereof. Following such payment, in February 2019 such Individual was appointed (and assumed such position in April 2019) to a full-time role as an Ohio governmental official directly involved in regulating The Cleveland Electric Illuminating Company, Ohio Edison Company and The Toledo Edison Company, including with respect to distribution rates.
In a November 20 letter to Ohio Governor Mike DeWine, Randazzo cited the impressions left by the FBI raid on his home and “a statement included in FirstEnergy Corp.’s filing” with the SEC as reasons for his resignation.
FirstEnergy’s descriptions of the individual who received the payment fits Randazzo, who was appointed PUCO chairman by Ohio Governor Mike DeWine in February 2019 and assumed the position that April. Two for-profit firms owned by Randazzo did business with FirstEnergy prior to his appointment, and Randazzo avoided answering questions about his murky financial relationship with FirstEnergy before and after he joined the commission.
The agreements FirstEnergy reached with lenders in November show that the company obtained limited waivers for its breaches of credit agreement provisions that require compliance with anti-corruption laws, breaches that resulted from the payment.
“The waiver restored the ability of FirstEnergy to draw on those credit facilities,” according to S&P Global.
Other more widely reported public statements about the payment made by FirstEnergy excluded mention of the regulator “acting at the request or for the benefit of FE as a consequence of receiving such payment” while acting in their official regulatory capacity.
The quarterly report FirstEnergy filed with the SEC in November more prominently featured the following disclosure:
… certain former members of senior management violated certain FirstEnergy policies and its code of conduct related to a payment of approximately $4 million made in early 2019 in connection with the termination of a purported consulting agreement, as amended, which had been in place since 2013. The counterparty to such agreement was an entity associated with an individual who subsequently was appointed to a full-time role as an Ohio government official directly involved in regulating the Ohio Companies, including with respect to distribution rates. At this time, it has not been determined if the payments were for the purposes represented within the consulting agreement.
More recently, the 2020 annual report FirstEnergy filed with the SEC last month included a widely reported statement that the company now “believes that payments under the consulting agreement may have been for purposes other than those represented within the consulting agreement.”
The annual report does make clear that FirstEnergy risks default should it face further allegations of non-compliance with anti-corruption and anti-bribery laws, a scenario in which $2.2 billion of the company’s debt could immediately become due for payment.
Lenders insisted on FirstEnergy’s strict compliance with its credit agreements moving forward in the waiver agreements signed in November, and warned against any further violations of anti-corruption laws. Copies of the original 2016 credit agreements that were amended in November can be found here and here.
FirstEnergy connected the dots between the $4.3 million payment and an ongoing federal bribery probe that centers on Ohio’s House Bill 6 bailout
FirstEnergy’s latest quarterly and annual financial reports directly connect its disclosure of the $4.3 million payment to an internal investigation the company launched last year in response to the ongoing federal bribery case against former Ohio House Speaker Larry Householder, four political operatives, and a dark money called Generation Now. Prosecutors have so far secured guilty pleas from three of the six defendants.
In September, FirstEnergy received subpoenas from the SEC as a part of another investigation sparked by a whistleblower who shared information related to the HB 6 criminal investigation.
A spokesperson for FirstEnergy declined to answer questions about the $4.3 million payment “due to the investigations” in an email to the Energy and Policy Institute (EPI). The questions posed to the company included a request for more information about specific actions taken by the company and the Ohio state utility regulator, presumably Randazzo, after the payment was made.
Randazzo also did not respond to questions that EPI sent via email.
“… the PUCO has three pending proceedings relevant to the criminal proceedings brought fourth [sic] by the DOJ,” Matt Schilling, PUCO’s director of public affairs, said in an email that pointed to a new webpage where PUCO provides information about those pending proceedings.
Provided with a copy of the statement FirstEnergy used to disclose the $4.3 payment to lenders in November, Schilling repeated an earlier statement from the Commission that said:
… [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.
Neither FirstEnergy nor Randazzo has been named or charged in the Householder case, but FirstEnergy has received multiple subpoenas. David DeVillers, the outgoing U.S. Attorney for the Southern District of Ohio who announced the bribery case last summer, recently told the Ohio Capital Journal that his team’s ability to present subpoenas and indictments has been limited since November by the Covid-19 pandemic that largely closed a grand jury. With the grand jury opening back up this month, DeVillers expected work to resume soon on corruption cases.
FirstEnergy is widely assumed to be the unnamed “Company A” that federal prosecutors say secretly paid $60 million for a $1 billion bailout of two nuclear power plants in Ohio. The bailout was delivered via enactment of Ohio’s controversial 2019 energy law, House Bill 6.
The only two nuclear plants in Ohio were owned by FirstEnergy Solutions (FES), a bankrupt FirstEnergy subsidiary, when HB 6 was signed into law by DeWine. The plants are now owned by Energy Harbor, the new company that emerged from FES’s bankruptcy last year. Energy Harbor has reportedly also been subpoenaed.
Ratepayers in Ohio were set to start paying for the nuclear bailout in January, but the fees were halted by orders from a Franklin County Court judge and the Ohio Supreme Court shortly before they hit electricity bills.
FirstEnergy also agreed in a settlement with Ohio Attorney General Dave Yost to forego unearned revenue and guaranteed profits made possible by a decoupling mechanism included in HB 6, which could have saddled FirstEnergy’s Ohio ratepayers with $755 million in additional costs by 2030.
FirstEnergy had misleadingly claimed that the decoupling mechanism was justified by energy efficiency programs that benefit ratepayers, but those programs largely ended after HB 6 rolled back Ohio’s efficiency standards for electric utilities. The company had long sought the rollback of Ohio’s renewable energy and energy efficiency requirements for utilities, as had Randazzo during his long career as an energy attorney and lobbyist prior to his appointment to PUCO.
Emails released by the Ohio House in response to a federal subpoena showed that while he was the PUCO chairman, Randazzo used an email account associated with his for-profit Sustainability Funding Alliance of Ohio to communicate with Householder’s senior policy advisor Pat Tully about HB 6 and other energy bills.
The Sustainability Funding Alliance appeared on lists of outside professionals employed by FES filed in the subsidiary’s bankrupt case in 2018, prior to Randazzo’s appointment to PUCO.
The $4.3 million payment was also a factor in FirstEnergy’s decision to terminate “certain former members of senior management” for violations of the company’s policies and code of conduct, according to the financial reports the company filed with the SEC in November and February.
On October 29, FirstEnergy announced its termination of CEO Charles Jones, senior vice president for external affairs Michael Dowling, and senior vice president of marketing, branding, and product development Dennis Chack. The October announcement cited FirstEnergy’s internal investigation related to the HB 6 bribery scandal, but made no mention of the $4.3 million payment, which FirstEnergy did not disclose publicly until after the FBI’s raid on Randazzo’s home a few weeks later.
“FirstEnergy admitted to clearing its C-suites because of a $4 million payment to an entity linked to Randazzo made immediately prior to Randazzo becoming chair of PUCO,” the January court filing by Yost’s office said. “The entity is believed to be Sustain[able] Funding Alliance of Ohio.”
What did FirstEnergy do with the money it improperly collected from ratepayers in Oho and other states?
The $4.3 million FirstEnergy payment that Ohio’s top state prosecutor believes went to Randazzo was part of a larger pot of transactions that FirstEnergy revealed on a February 18 earnings call and in its 2020 annual report was “improperly classified, misallocated… or lacked supporting documentation” and “resulted in amounts collected from customers,” as first reported by Cleveland.com.
Christopher Pappas, the independent executive director of FirstEnergy’s board, said on the earnings call that the transactions were for “small amounts” and included money paid for vendor services. He said the transactions could also include lobbying and political and charitable spending.
Pappas said the majority of those “deficiencies” occurred in Ohio, but that some also occurred in other states. He also said that some of the spending that ratepayers improperly paid for dated back ten years or more.
FirstEnergy did not provide a total dollar amount for the money it improperly collected from customers. The company said it will be working with regulatory agencies to “address the amounts” but provided few specifics on those efforts.
The Ohio Consumers’ Counsel (OCC) is set to depose Santino Fanelli, the director of rates and regulatory affairs for the FirstEnergy Service Company, on March 9, as part of PUCO’s ongoing review of FirstEnergy’s political spending in support of HB 6. In a related filing, the OCC said its:
… questioning will also extend to recent revelations made by FirstEnergy Corp. executives that they have discovered transactions over a long period of time that were improperly classified, misallocated or lacked proper documentation with amounts being collected from customers (primarily in Ohio). FirstEnergy Corp. has acknowledged that these transactions could include lobbying and political activities misallocated to the FirstEnergy Utilities, resulting in collections from customers.
The OCC also said the recent disclosures “call into question the veracity” of earlier statements that FirstEnergy made to PUCO in response to the review, including in a sworn affidavit signed by Fanelli. In those earlier statements, FirstEnergy denied that its regulated Ohio utilities had charged ratepayers for the costs of political spending in support of HB 6 in rates, or included such spending in accounts used to calculate riders and charges.
FirstEnergy said last month that the transactions were identified as part of the internal investigation that was spurred by the ongoing government investigations into HB 6. However, FirstEnergy also revealed last month that it received a letter from the Federal Energy Regulatory Commission’s Division of Investigations in January that directed the company to “preserve and maintain all documents and information related to an ongoing audit…. including activities relating to lobbying and government affairs activities concerning HB 6.”
FERC launched an ongoing audit of FirstEnergy in early 2019, just prior to the introduction of HB 6. FERC audits often find that utilities improperly account for expenses like lobbying and include them in rates, sometimes resulting in refunds.
A witness from the service company who provided testimony to state utility regulators in New Jersey last year said FERC’s audit report will “include selective tests of Service Company cost allocation methodologies and charges billed by the Service Company to the FEU [FirstEnergy Utilities].”
The Jan. 18 earnings call also took place one week after the release of a new analysis by EPI which found that FirstEnergy ratepayers in Ohio and four other states may be on the hook for millions of dollars that the company’s thirteen regulated utilities spent on a suite of external affairs and government affairs services in 2017-2019.
EPI’s analysis highlighted evidence that the FirstEnergy utilities improperly allocated payments made to the FirstEnergy Service Company for services that included lobbying and other political activities included administrative and general expenses and outside services in their annual reports to FERC.
The thirteen utilities paid the service company a total of $144 million for the suite of external and government affairs services, and allocated $137 million of that spending to the account for outside services.
Those services were largely overseen by Dowling prior to his termination as FirstEnergy senior vice president of external affairs in connection with the HB 6 bribery scandal. Evidence presented by federal prosecutors in the Householder case identified the “Company Service Co.” as the main source of once secret funding that was used to procure Householder the speaker’s spot in early 2019, and then to secure passage of HB 6 and defeat a petition campaign that sought to overturn the new law via a voter referendum.
The thirteen FirstEnergy utilities paid the FirstEnergy Service Company nearly $27 million from 2017-2019 just to provide rates and regulatory support, which service agreements defined as including “regulatory activities and consulting” that involved monitoring and participating in “regulatory affairs at the local, state, and federal level.” The FirstEnergy utilities allocated nearly all of that money to an account for “outside services” expenses, EPI’s analysis found.
Dowling’s executive agency lobbying reports for Ohio show that he lobbied PUCO on behalf of FirstEnergy during Randazzo’s tenure as chairman of the commission, which lasted from April of 2019 to November of 2020. His executive lobbying reports only listed “electric related issues” in a field where lobbyists are asked to report the “the specific agency decisions on which active advocacy occurred during this reporting period.”
Dowling’s separate legislative lobbying reports for Ohio do show that he lobbied state legislators on HB 6 and other energy legislation, including one bill to “reform and modernize” PUCO.
Randazzo’s lobbying reports also show that he lobbied the legislature on H.B. 6 on behalf of PUCO while chairman. He openly testified as an interested party during public hearings on the bill.
After Randazzo resigned, the Citizens Utility Board of Ohio (CUB Ohio) filed a complaint with PUCO that said Randazzo “had presided over a number of… matters during his tenure that resulted in rulings that were favorable to the FirstEnergy EDUs.”
“He took these actions in apparent contravention of state law, Ohio Revised Code 102.03, governing actions by public officials who have engaged in transactions with regulated utilities,” the complaint said.
CUB Ohio said that Randazzo facilitated the passage of HB 6 when he testified that the cost of the proposed nuclear subsidy would be offset by the rollback of the state’s renewable energy and energy efficiency standards, and claimed that he could not quantify ratepayer savings from energy efficiency programs.
Analysis by environmental groups told a different story. They found that the energy efficiency standards generated net savings for Ohioans, and that HB 6 would actually increase electricity bills by eliminating those savings. Their analysis was based on annual reports that Ohio’s utilities filed with PUCO to document savings from their energy efficiency programs.
The Environmental Law & Policy Center (ELPC) also filed a motion asking PUCO to reconsider four other FirstEnergy cases that Randazzo had participated in. The motion was focused on the FirstEnergy cases that ELPC had participated in while Randazzo was chairman, but the group also said publicly the request could be applied to all of the FirstEnergy cases that Randazzo participated in while serving on the commission.
Under Randazzo’s leadership last year, PUCO paved the way for FirstEnergy and other utilities to resume disconnections for nonpayment in the midst of the Covid-19 pandemic despite objections from consumer advocates.
A plan for resuming disconnections that FirstEnergy filed with PUCO last summer pointed out that as early as last May, the commission chaired by Randazzo had determined that “even in light of the emergency, service disconnections for non-payment cannot be suspended indefinitely.” PUCO then ordered utilities to submit plans for a “safe return to pre-Covid 19 operations,” as health experts warned that the pandemic was far from over.
Randazzo participated in PUCO’s decision to approve FirstEnergy’s plan, which was strongly criticized by consumer advocates who oppose resuming disconnections during a global pandemic that’s left many ratepayers unable to pay their bills.
Randazzo also served as the head of the Ohio Power Siting Board (OPSB) while he was the chairman of PUCO. Cleveland’s City Council President Kevin Kelley is considering launching a new inquiry into whether the $4.3 million payment disclosed by FirstEnergy influenced a 2020 OPSB decision that almost sunk the Icebreaker offshore wind power project on Lake Erie.
Murray Energy paid over $1 million to a law firm that represented anti-wind opponents who backed the “poison pill” provision in the OPSB case. The coal producer, a close political ally of FirstEnergy, also paid $100,000 to a pro-Householder dark money group in 2018. FES later rescinded its plans to shutter the W.H. Sammis coal-fired power plant, a big buyer of Murray Energy coal, and attributed the decision directly to its improved financial situation under HB 6.
Randazzo’s financial connection to FirstEnergy extends to his earlier time on PUCO Nominating Council
House Bill 6 marked the culmination of Randazzo and FirstEnergy’s years-long war on renewable energy and energy efficiency in Ohio.
Prior to Randazzo’s appointment as PUCO chairman, he served on the PUCO Nominating Council from 2008 to 2019, a committee which nominates potential new PUCO members for appointment by the governor.
FirstEnergy’s latest statements about the $4.3 million payment indicate it was made “in connection with the termination of a purported consulting agreement, as amended, which had been in place since 2013.”
It’s not clear if the “as amended” indicates that the agreement was in place before 2013, but the years ago the FirstEnergy Service Company reported to the SEC that it paid $500,000 to “IEU Ohio to provide “outside services” related to “Ohio natural [gas] and electricity issues” in 2004.
Randazzo helped to form a nonprofit trade association called the Industrial Energy Users-Ohio, or IEU-Ohio, in 1992 and still served as its general counsel when he applied for a seat on the PUCO in 2019, according to his resume.
Financial disclosure statements filed by Randazzo also listed him as the owner of the IEU-Ohio Administration Company, a for-profit firm incorporated in Ohio in 2003. FES listed the IEU-Ohio Administration Company as a creditor owed just over $43,000 on a bankruptcy filing in 2018.
FirstEnergy paid “IEU-Ohio” $845,000 from 2010-2014 for services rendered as a third-party administrator for energy efficiency programs in Ohio, according to information PUCO provided to the state legislature’s Energy Mandates Study Committee in 2015.
In 2013, Randazzo, IEU-Ohio, and the Sustainability Funding Alliance of Ohio sided with FirstEnergy in opposing Ohio’s renewable energy and energy efficiency standards and the 50 MW Turning Point Solar project.
Top photo is a screenshot from a video of Samuel Randazzo speaking at a 2018 meeting organized by the Seneca Anti-Wind Union