Regulation of electric utility companies is best conducted when public utility commission regulators are afforded a significant level of independence from the political process. Close observers of utility regulation, however, recognize that PUCs have become increasingly politicized. There are several mechanisms through which politicians can influence PUC regulatory processes, including holding disciplinary hearings, appointing commissioners and amending governing legislation. Assuming that politicians represent their constituents’ interests, one might expect these mechanisms to produce consumer-friendly regulatory outcomes, including a low authorized return on equity, or ROE.
The susceptibility of PUCs to political influence, however, provides regulated utilities with a back door of influence over their regulatory environment. Cognizant of the power politicians wield over PUCs, utilities employ both lobbying and campaign contributions in an attempt to increase profits, which strongly depend on PUCs’ rate case proceeding decisions. In Ohio, for example, FirstEnergy was criminally charged with bribing state politicians to plant an industry-friendly lobbyist as the head of the Ohio Public Utilities Commission and pass legislation that bailed out its nuclear power plants. This example highlights an explicit bribe perpetrated by an electric utility to favorably influence its regulatory environment, but utilities need not resort to illegal activity to achieve similar results.
In a recent working paper published by the Center for Growth and Opportunity at Utah State University, I estimate the effect of legalizing electric utility political contributions on the ROE PUCs authorize during rate cases. Simply stated, ROE is a utility’s rate of return on its capital investments and therefore contributes significantly to the utility’s profitability. Although PUCs have final say over the ROE established in a rate case proceeding, the rate is determined using a subjective process shaped by two Supreme Court decisions, making it particularly susceptible to political influence.
To estimate the effect of political contributions on authorized ROE, I exploit the 2005 repeal of the Public Utility Holding Company Act of 1935, or PUHCA, a New Deal-era federal law designed to restrict holding company monopoly power. A powerful but little-known provision within the law prohibited holding companies and their subsidiaries from using corporate treasury funds to contribute to local, state and federal political parties and candidates.