As Wall Street analysts and anxious shareholders continue to wait for more dominoes to fall from a federal corruption probe in Ohio, investor-owned utilities could feel greater pressure to avoid any semblance of improper political activity by voluntarily disclosing contributions to "dark money" groups.

"I think there will be efforts to create transparency. I don't know really what is going to end up happening," Glenrock Associates LLC analyst Paul Patterson told S&P Global Market Intelligence, expressing skepticism over a "nationwide movement."

"I think it can vary from jurisdiction to jurisdiction," Patterson said.

David Pomerantz, executive director of the Energy and Policy Institute, a utility watchdog organization, said the Ohio scandal has led to "increased scrutiny on utilities' use of 501(c)(4) groups to covertly spend money in pursuit of their political agenda, both from policymakers and from investors."

"I think that scrutiny's very well-founded," Pomerantz said in an email response to questions about the issue. "After all, if a utility is pursuing political advocacy that's so potentially toxic to the public that utilities feel compelled to hide their role in it, investors are right to question whether the company is pursuing a politically sustainable course."

Akron, Ohio-headquartered FirstEnergy Corp. on a July earnings call disclosed that it spent about $15 million to support subsidies for the massive merchant nuclear plants embroiled in the federal investigation behind the passage of House Bill 6 in Ohio.

Federal prosecutors filed bribery charges against former Ohio House Speaker Larry Householder and four associates, including lobbyists, who have been indicted and accused of using "more than $59 million" through a "slush fund" used to steer the nuclear subsidy bill through the Ohio Legislature. An affidavit filed by an FBI special agent implies FirstEnergy and affiliated entities, though not mentioned by name, wired funds through a 501(c)(4) nonprofit group called Generation Now to support H.B. 6 and Householder-backed candidates in the Ohio House of Representatives.

The affidavit and an indictment filed July 30 in the U.S. District Court of the Southern District of Ohio state that from August 2019 through November 2019, after H.B. 6 was signed into law, "Householder's Enterprise received over $38 million into Generation Now from Company A" with $23 million then transferred to "Front Company," which was formed to defeat a ballot initiative seeking to repeal the legislation.

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FirstEnergy CEO Charles Jones Jr. defended the company's contributions to Generation Now to fight the statewide referendum effort by Ohioans Against Corporate Bailouts.

"There was a lot of money spent on both sides and 501(c)(4)s were used on both sides," Jones told analysts and investors on a July 24 earnings call.

Media reports also linked American Electric Power Co. Inc. to a "dark money" group, identified as Empowering Ohio's Economy Inc., alleged to have provided $150,000 to Generation Now and $200,000 to the Coalition for Opportunity & Growth in support of H.B. 6.

AEP Chairman, President and CEO Nicholas Akins has promised increased transparency around the company's contributions to 501(c)(4) organizations while maintaining the Columbus, Ohio-headquartered utility did not make any contributions to Generation Now.

"Starting in 2015, AEP contributed a total of $8.7 million to Empowering Ohio's Economy," Akins said on an Aug. 6 earnings call, adding the utility's contributions were "appropriate and lawful."

The CEO, however, said AEP understands concerns about the "lack of transparency surrounding 501(c)(4) organizations, which are not required to disclose their donors and amounts donated to them."

"With that in mind, we will commit to include additional disclosures in our corporate accountability report with respect to contributions that we made to 501(c)(4) organizations in 2020 and going forward," Akins said.

The Ohio Statehouse building in Columbus, Ohio. Source: Thinkstock

'A question of public trust'

There are now bipartisan efforts in the Ohio Legislature to repeal H.B. 6 and improve transparency around political contributions.

Glenrock's Patterson also noted how Ohio Gov. Mike DeWine changed his tone within a 24-hour period to advocate for the repeal of the subsidy law following the announcement of criminal charges.

"It's a question of public trust," Patterson said.

The U.S. Internal Revenue Service states that tax-exempt 501(c)(4) organizations "must not be organized for profit and must be operated exclusively to promote social welfare."

Under the IRS code, these social welfare organizations are prohibited from "direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity."

Under pressure

Scotia Capital (USA) Inc. analyst Andrew Weisel in a recent research report noted FirstEnergy "is not alone" in contributing to 501(c)(4)s and warns against painting the utility industry with a broad brush.

"We recommend against witch hunts," Weisel wrote, noting "several investors have asked which other U.S. utilities may be at risk of finding themselves in a similar situation."

Investors have pointed to companies such as Public Service Enterprise Group Inc., Exelon Corp. and Dominion Energy Inc. that stand to benefit from similar nuclear subsidy programs or market reforms with Dominion, NextEra Energy Inc. and Southern Co. seen as companies that "benefit from particularly strong political/regulatory relationships."

Guggenheim Securities LLC analyst Shahriar Pourreza said investors are questioning "well what about other utilities that are very powerful, like the Southeast utilities and Virginia utilities and New Jersey utilities and North Carolina utilities ... is this going to bleed into those utilities that have been able to get legislation and everything else given to them?"

"I think investors will increasingly push for that disclosure and [companies] will be forced to do it," Pourreza said.

Exelon President and CEO Christopher Crane promised to take "every possible step" to regain the trust of stakeholders in Illinois in response to subsidiary Commonwealth Edison Co.'s role in a yearslong effort to improperly influence legislation through steering jobs and contracts to associates of a top lawmaker. A deferred prosecution agreement reached with federal investigators requires ComEd to pay a $200 million fine, continue to cooperate with the government's investigation and enhance its corporate compliance program.

In Michigan, CMS Energy Corp. subsidiary Consumers Energy Co. agreed to refrain from making corporate contributions to certain social welfare and political advocacy groups as part of a January 2019 settlement agreement with the Michigan Public Service Commission.

Consumers Energy reportedly made millions of dollars in contributions to a 501(c)(4) nonprofit called Citizens for Energizing Michigan's Economy, the subject of a July 2018 complaint filed with the IRS alleging the group operates in violation of its charter to use funds for social welfare purposes.

Glenrock's Patterson said it "shouldn't be surprising to anyone" that utilities would seek to influence energy policy.

"I think it is important to note that some of this stuff might not actually be illegal," Patterson said.

A growing concern

Duke Energy CFO Steven Young said the company will "respond accordingly" to changes around political contributions. Source: Duke Energy Corp.

Duke Energy Executive Vice President and CFO Steven Young recently defended his company's contributions to 501(c)(4) organizations.

"The use of the [501(c)(4)s] is a tool we have used in the past," Young said in an Aug. 10 phone interview. "We did not contribute to the [501(c)(4)] that is in question in Ohio and we have, I think, very thorough governance surrounding our political contributions. ... We are very comfortable with what we've done in the political arena."

The CFO acknowledged there "certainly could be a broad examination of disclosures around political contributions," including the use of 501(c)(4) organizations.

"We would respond accordingly and if changes need to be made, we would be fine with that," Young said.

Dominion executives also were among those questioned about the use of social welfare organizations during second-quarter earnings calls.

"We have fully disclosed 501(c)(4) contributions for many years," Dominion Chairman, President and CEO Thomas Farrell II told analysts and investors.

Pointing to the company's "trendsetter" ranking on the Center for Political Accountability-Zicklin Center Index, Farrell said, "[O]ur disclosure ranks among the highest in the country, certainly among the highest in utilities for its transparency."

The CEO added that over the last five years, the company has contributed "under $500,000" to 501(c)(4) organizations, the bulk of which went to an organization with ties to the American Petroleum Institute to support pipeline projects.

"And we have no intention of changing our practices because they are perfectly appropriate, completely compliant with every state and federal law by wide margins," Farrell said. "We have nothing to be concerned about with respect to any of our political giving or giving to these so-called 501(c)(4)s."

Guggenheim's Pourreza said political contributions and lobbying are very commonplace among investor-owned utilities, many of which employ lobbyists.

"As a regulated utility, you're quasi a politician. You're a political animal," Pourreza told S&P Global Market Intelligence.

"Many utility investors may have previously viewed efforts by utilities to influence political dynamics in key jurisdictions as positive for earnings, but the FirstEnergy corruption scandal and others, like [Pinnacle West Capital Corp.'s] dark-money spending in Arizona that has made it politically radioactive, have thrown into relief the risks associated with such efforts," Pomerantz, with the Energy and Policy Institute, said.

The Arizona State Capitol building in Phoenix. Source: Thinkstock

The Arizona barometer

Several industry observers pointed to questions surrounding campaign contributions made by Pinnacle West and its subsidiary Arizona Public Service Co. as a focal point for campaign finance disclosures.

Arizona Corporation Commission Chairman Bob Burns has long accused the state's largest utility of committing "regulatory capture" by backing candidates for the commission that the company believed would best support its interests. Pinnacle West disclosed that it gave millions of dollars to political organizations that supported ACC candidates in 2014 and 2016 elections.

As a result, the ACC in July 2019 adopted an amendment requiring commissioners to recuse themselves from participating in any case involving a contributor.

A key question remains regarding whether ratepayers, not shareholders, paid for any of the Arizona utility's campaign contributions.

Pourreza said these cases are expected to lead to federal prosecutors taking a closer look at the use of "dark money" groups by utilities.

In the case of FirstEnergy, "they have the right to put money into a 501, but the question was were they aware that it was being misappropriated? And that's really what the problem is," the analyst said.

FirstEnergy management, however, has been adamant that they did nothing wrong.

"We downgraded the stock because the problem you run into ... is you won't know that answer for a year to a year and a half," Pourreza said, calling the criminal affidavit "extremely strong" and "somewhat disturbing."

The analyst said he sees these criminal probes, more than an increased focus on environmental, social and governance practices, as the main factor leading to increased campaign finance disclosures.

"I think the focus now will turn into [utilities] improving the disclosures, not so much because of ESG but I think because of what has transpired," Pourreza said.

Pomerantz said he could not provide a definitive answer on whether utilities will respond to the increased investor and shareholder pressure.

"In the past, they have almost always resisted any efforts from regulators and from shareholders to curtail their ability to spend unlimited amounts of money, and to do so secretly," Pomerantz said. "I do think it's in utilities' own best interests to check their worst impulses and to conduct their political advocacy out in the open. So many utilities have gotten themselves in hot water because they have been unable to resist the temptation to pursue colossally risky politics when they think no one is watching."