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New rules on Duke Energy and other utilities will help ensure ratepayers don’t foot the bill for image-boosting ads, political contributions, or the flock of lobbyists the companies regularly dispatch to the North Carolina capitol.
But the guidelines will do little to stem the millions that Duke shareholders are pouring into state politics or shed new light on exactly where most of their money is going — realities largely beyond the control of state utility regulators.
Still, NC WARN, one of the nonprofits that petitioned for the rules in 2018 and a frequent Duke critic, welcomed the regulations as a “partial victory.”
“They have to spend all of this influence money to keep the other two legs of their business model going, which is to build stuff and raise rates,” said Jim Warren, the group’s director.
“This doesn’t stop that, but it stops them from soaking customers for it.” He added, “and it draws attention to the odious nature of the business practice.”
While the rules apply to all publicly regulated utilities, the petitioners’ main target was Duke Energy, the Charlotte-based monopoly that produces, transmits, or sells virtually every electron in the state.
Duke radio and television ads touting its commitment to renewable energy and plans to cut carbon emissions have long irked advocates who contend the spots belie the company’s plans for a spate of new fossil fuel plants and a meager increase in solar.
What’s more, NC WARN and Friends of the Earth argued in their petition, Duke is already guaranteed customers by geography.
“Why should a monopoly be permitted to expend a substantial amount of customers’ money to advertise,” they wrote, “when there is no competition?”
Duke’s political spending has also raised hackles. While the company can’t give directly to candidates or their committees, it can spend vast sums on other groups with political aims.
In the last 18 months, the company has donated nearly $700,000 to political groups Citizens for a Responsible Energy Future — a creation of its own former executives — and GOPAC, Inc. — which promotes Republicans. In 2020, filings to federal regulators show Duke’s two utilities spent a combined $16.3 million on “Certain Civic, Political, and Related Activities.”
Like most well-heeled corporations, Duke regularly hires a robust team of lobbyists to advocate its interests in Raleigh and in Washington, D.C. This year the company has a record 13 lobbyists at North Carolina General Assembly who are on track to collectively earn over $1 million.
There’s wide agreement that most of this “influence money,” as Warren dubs it, isn’t necessary for Duke and other utilities to provide affordable and reliable electric service. By law, such spending should be covered by shareholders, not ratepayers.
Yet during Duke rate cases, Public Staff, the state-sanctioned ratepayer advocate, routinely identifies advertising and political costs inappropriately allocated to customers.
Last year, Public Staff exposed over $2.8 million in expenses on advertising, lobbying, and contributions to business advocacy groups like the N.C. Chamber that Duke Energy Carolinas wanted to recover from ratepayers. The utility ultimately accepted that accounting as improper.
‘The gray area’
The order issued earlier this month by the North Carolina Utilities Commission is an effort to reduce such improprieties.
“There are some utility costs that are undeniably appropriate for inclusion in the utility’s cost of service and some that… are undeniably inappropriate,” commissioners wrote. “The Commission’s challenge is to address those that fall into the gray area between these two markers.”
As N.C. Policy Watch reported last week, the panel clarified that lobbying not allocable to ratepayers includes overtures to legislative aides and government agencies themselves, not just their employees. Exceptions will include engagement in initiatives deemed beneficial to the public interest, such as crafting the state’s Clean Energy Plan.
Advertising intended to burnish utilities’ images on all platforms, including social media, must be covered by shareholders. Plus, investors should pay for charitable contributions not directly helpful to North Carolina ratepayers, whether they are to so-called “nonprofit” entities or not.
At the same time, the panel noted, “the Commission reiterates its intent to allow utilities to continue recovering from ratepayers that portion of trade organization membership dues for groups like the [Edison Electric Institute] …that are attributable to research, best business practices, and other educational purposes,” while denying recovery of the portion not in North Carolina customers’ interest.
Public Staff, advocates who petitioned the commission, and Duke itself all said the rules served to bolster and solidify current practice rather than chart a new course on discretionary spending by utilities.
“It codifies an area that has been loose for so long and that Duke Energy has gamed so many times,” said Warren. “Supposedly they’ve always been prohibited from recovering these different influence categories. Yet time after time, these items come up in that list of expenditures that they negotiate with the Public Staff.”
Michelle Boswell, staff accountant with Public Staff, is confident that under the current system, her agency is removing all the costs inappropriately charged to ratepayers.
But, she said, “it is generally helpful to us when the commission gives us additional guidance on which types of costs it considers definitely or potentially disallowable.” She added, “we are particularly happy that they have explicitly included competitive and image advertising in that category, as well as lobbying not intended to benefit customers.”
Still, said Dianna Downey, chief counsel for Public Staff, “while we’re going to make sure they’re providing the additional information the commission has ordered, my impression is it’s not going to change what we do very much.”
Above the line or below the line?
Indeed, Public Staff and the Utilities Commission are only concerned with the expenses Duke and other utilities allocate to ratepayers in a rate case, referred to as “above the line.”
And while Duke may include inappropriate outlays above the line in the millions, its overall expenses for political contributions, lobbying, and advertising is in the tens of millions. In 2020 alone, Duke’s two North Carolina utilities spent over $50 million on such costs, according to federal reports.
So long as those costs stay “below the line,” where they will be borne by shareholders, regulators have no basis to examine them. “Once earned, a utility’s return is the property of the utility to be used for any lawful purpose,” commissioners wrote in their order.
Thanks largely to a series of U.S. Supreme Court decisions giving corporations more avenues to fund election and election-adjacent activities, it’s lawful for Duke to both contribute to political groups and keep most of those donations hidden.
While the IRS requires 527 political groups like GOPAC, Inc., to report its funders, the connected entity GOPAC Education Fund has no such requirements. Similarly, Duke posts its 527 and political committee contributions online twice a year but doesn’t disclose donations to connected entities.
This year, Duke hasn’t contributed to GOPAC, Inc. yet, according to the group’s IRS filing, though numerous oil and gas interests have, including Koch Industries and the American Gas Association. Asked by email if the company has contributed to GOPAC Education Fund this year or last, or planned to disclose its donations, spokesperson Grace Rountree didn’t answer directly.
“Duke Energy is proud to participate in public discourse on important energy topics that affect our customers and our company’s role in providing affordable energy in North Carolina,” she wrote. “All our giving is done in compliance with relevant laws and disclosure requirements and is funded by Duke Energy shareholders.”
Whether with backing from Duke or not, Arlington, Virginia-based GOPAC Education Fund has waded into the debate over controversial energy legislation the company supports, H 951, which narrowly passed the House last month.
The group sent out at least two mailers to the districts of House Majority Leader Rep. John Bell of Wayne County and Rep. Howard Penny, Republican of Harnett County, thanking the lawmakers for backing the bill.
Like advertising earlier this year sponsored by Citizens for a Responsible Energy Future, the postcards reference hot button national issues that hold appeal for conservative voters — in this case inveighing against the Green New Deal and a carbon tax.
The two mailers alone can’t have been a big investment, but they could foreshadow more significant spending to come. Citizens for a Responsible Energy Future spent at least $367,000 in the 2020 primaries, and Democrats in the General Assembly fear that Duke will spend millions to promote Republicans in 2022 via a web of other so-called ‘dark money’ groups.
‘50 million extra dollars’
Though these expenditures aren’t technically above the line, critics contend all shareholder profits ultimately originate with customers. Influence spending, Warren believes, violates ratepayers’ First Amendment and should be prohibited.
“It’s an accounting fiction,” Warren said, for ratepayer money to be paid to Duke, then, “filtered through the system and, at some point, turned into greenwashing ads or targeted philanthropy to buy favor with different entities and to stifle criticism.”
Two years ago, the Utilities Commission rejected that argument in no uncertain terms, writing in a unanimous order that the laws governing utility regulation gave the panel no legal basis to restrict the use of Duke’s profits.
“Nowhere in these statutes, or the Act, is there even a hint of the Commission having authority to direct how the utility or its parent company spends the utility’s earnings,” they wrote.
Bob Hall, a campaign finance expert who weighed in on the recent ruling and is sympathetic to Warren’s case, agrees with commissioners on this point — “in a narrow way,” he said. “They can’t prevent a certain freedom of speech for the utility.”
But, he suggests, “the ratepayers are being forced to subsidize Duke’s political speech because the Utilities Commission grants them such a high rate of return. If they’ve got 50 million extra dollars to just throw around on all this ‘goodwill lobbying’ stuff, maybe they’re getting too big a profit.”
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