Opinion: Electric Monopoly Corruption and Market Promise

Former Ohio House Speaker Larry Householder (R), who was indicted in a bribery scheme last month. Ohio House photo

As bags of cash were being passed around Illinois and Ohio statehouses, one thing was clear. No one paying or receiving the bribes had one iota of concern for the true victim in all of this: the customer.

In Illinois, the utility Commonwealth Edison — the flagship brand of utility giant Exelon — will pay $200 million to defer prosecution on a federal bribery charge for facilitating kickbacks at the behest of Illinois’ speaker of the House.

While in Ohio, the FBI arrested and charged the Ohio speaker of the House and several associates with racketeering in a scheme almost exclusively funded by the state’s largest utility, FirstEnergy.

It needs to be noted that all Maryland utilities are subsidiaries of these two parent companies, Exelon and FrisEnergy. This corruption is knocking on your door.

When you examine the details of the scandals in both states you wonder how these things could be allowed to happen. The Illinois speaker allegedly asked ComEd to appoint his fixer to its corporate board, the utility agreed. Meanwhile, FirstEnergy has been accused of paying $60 million into a “bank” for the Ohio speaker’s political machine, according to one co-conspirator.

But the reality is the cozy relationship between utility executives and government officials makes these situations possible.

Historically, utilities are monopolies regulated by government agencies. This puts them in a unique business model where the profit motive encourages favorable political treatment, not satisfying customers. The government sets the terms and prices the utilities can charge; so, who is the real “customer” of these utilities? State government officials.

This system encourages utilities to profit through legislative action. In Illinois and Ohio, the utilities took this road and decided to bend the rules in the process.

What needs to be done to fix this system?

First, prosecute all the offenders as needed to further justice. In the long-term the utility industry needs to look at how to minimize opportunities for corruption. Policymakers should shrink utility monopolies down to their appropriate size — no bigger than required to safely operate the local networks for electricity and natural gas.

In Illinois and Ohio, the beneficiaries of the corruption were nuclear power plants owned by corporate affiliates of the utilities not the “poles and wires” companies. If the nuclear plants had been owned by a separate entity the opportunity and motive would have been minimized.

Competition requires a different strategy that utilities are not always prepared to engage.

Competition benefits end-use customers by lowering costs and bringing innovation, but it can also be a safety valve to protect against corruption. Companies need to focus on long-term reforms that will help their actual customers, not government officials. The path forward is clear if these companies and policymakers are open to change.

Competitive markets should provide electric generation free of any association with legacy utility monopolies. Power plants should be fully separated from monopoly utilities so that utilities are agnostic as to where their customer’s generation is sourced.

Monopolies should not be the “default” provider of energy to customers. Many states enacted competitive reforms but let legacy utilities retain some control over the procurement of energy. This lets utilities exploit their brand and subsidize themselves.

Monopoly “licenses” should be put out for bid. If another entity can come in and run the system more effectively, then they should have the ability to step in and take over. This would require the monopoly to put their focus on the true customer.

Companies should compete for a living profit by lowering costs and making productive investments that benefit customers. Monopoly utilities, however, reward shareholders by securing favorable legislative and regulatory changes, including those that artificially increase revenue streams and bail out failing assets.

The entrenchment of monopoly utilities in the legislative process further increases the opportunity for corruption. Over the coming decades, billions will be spent to decrease the carbon footprint of the energy sector that currently depends on fossil fuels.

If corrupt utilities and local political cartels are left in charge of these investments, customers will continue to be victims of scandals perpetrated by corporate greed. If competition and good governance prevail, customers and the environment stand to benefit.

— MIKE HAUGH

The writer is a senior fellow with the R Street Institute and has worked on behalf of the residential utility advocate in Ohio.