FirstEnergy money trail for customer fees was muddied, new state audit finds

An Ohio audit tied to the House Bill 6 scandal investigation could not detemine how FirstEnergy Corp. used nearly $460 million it collected from customers that was supposed to be spent to modernize the electric grid.

That's because the money, collected under what was called a distribution modernization rider, also called Rider DMR, was placed into a general pool of money used by FirstEnergy; the auditors said because of that they could not say specifically where those funds went, and recommended the utility adopt a system to more closely document the funds' path.

The money was collected from 2017 through 2019. As part of a court ruling, the Akron electric utility was then ordered to return some of the funds to customers. According to the 137-page audit report, FirstEnergy collected more than $485 million from Jan. 1, 2017, through the summer of 2019, then refunded slightly more than $28 million of that total.

The report was released late Friday morning.

FirstEnergy said it disagrees with "many" of the audit report findings and will offer specifics in formal comments it plans to submit in the near future to the PUCO.

The utility said it does not believe the report adequately recognized the authorized purposes of Rider DMR or how it worked.

"We are reviewing the audit report just filed," the utility said in a statement. "We believe we have followed the rules established by the PUCO regarding the Distribution Modernization Rider (Rider DMR) implementation. We respectfully disagree with many of the conclusions in the report, and the methodology used."

Auditors said the spending trail hindered their goal of establishing whether the customer fees were spent improperly.

"Once funds enter the money pool, they lose their identity and can no longer be traced back to any specific rider or tied to specific spending," the auditors said. "We found no documented evidence that ties Rider DMR spending to lobbying for the passage of H.B. 6. However, given the inability to trace how Rider DMR funds were spent, we cannot rule out with certainty use of Rider DMR funds to support of the passage of H.B.6."

FirstEnergy did not track any spending tied directly to Rider DMR revenue because it was not required to track any spending from the rider revenue by regulations, the report said.

"It should have been incumbent on FirstEnergy to track such spending," the report said.

The audit report said money recovered from other riders used to pay for FirstEnergy grid modernization projects from 2017 into 2019 suggests "Rider DMR funds did not fund these grid modernization projects."

But a successor grid modernization program FirstEnergy is operating under, referred to as Grid Mod I in the audit report, "is a much more effective and transparent way to incentivize and track grid modernization spending than Rider DMR," the report says.

Auditors said that it was "apparent" in interviews with FirstEnergy staff "that there was a general lack of knowledge on the specifics of Rider DMR. .... The overall lack of knowledge suggests that grid modernization was not a well-communicated goal. This was reinforced by a lack of reference to Rider DMR or grid modernization in corporate and board documents, such as the Audit Committee agendas or Board of Directors strategy and regulatory booklets."

As part of its investigations into the ongoing House Bill 6 scandal, the Public Utilities Commission of Ohio in 2020 ordered an independent audit of the Rider DMR money. Massachusetts-based Daymark Energy Advisors performed the audit. The PUCO has other related investigation and audits into FirstEnergy separate from federal and other Ohio investigations into the $61 million bribery and racketeering scandal.

The report has 17 findings and recommendations, including saying that the PUCO should address and order clear data tracking and other requirements in its future orders.

The auditors also recommend that the utility money pool be audited more frequently.

The report also recommends that FirstEnergy's Ohio utilities — Ohio Edison, Toledo Edison, and the Cleveland Electric Illuminating Company — establish a formal dividend policy related to money that is channeled to their corporate parent.

FirstEnergy is tied to the criminal investigation revealed in the indictment of five people in July 2020. The indictments led to the firing in that fall of the company's CEO, Chuck Jones, senior vice presidents Mike Dowling and Dennis Chack, and the separations of other top executives.

FirstEnergy was accused of paying $61 million in bribes to put then Republican House Speaker Larry Householder and his team into power. And then, as part of House Bill 6, they worked to pass a bailout bill worth $1.3 billion to FirstEnergy and other utilities that included subsidies for Ohio nuclear power plants now owned by Energy Harbor, a former FirstEnergy subsidiary. The cash was also used to defend H.B. 6 from a referendum.

First Energy agreed to pay $536 million in fines and refunds as part of a three-year deferred prosecution agreement with the Department of Justice.

Beacon Journal reporter Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com. Follow him @JimMackinnonABJ on Twitter or www.facebook.com/JimMackinnonABJ.

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